EUR/CHF had a whippy day on Monday as traders first reacted to the meeting between Merkel and Sarkozy with relief. The meeting supposedly has formed a framework for fiscal union in the EU, and this is what the markets have been waiting for. With this in mind, the pair rose in value during the earlier part of the session.
However, during the US afternoon, the ratings agency S&P was rumored to be putting all of Europe’s AAA-rated countries on “Credit Watch Negative”, meaning that a downgrade could be coming for some of the region’s strongest economies. The idea of a Germany, Finland, or France losing their rating would weaken the concept of a “super bond” that so many are looking for. This would certainly punish the EU in many unforeseen ways.
The pair has been stagnant over the last couple of months since the Swiss National Bank put in a “floor” of 1.20, and the market has abandoned the once great one-way trade south. The selling of this pair is going to be difficult to do over the long-term as the SNB looks more than willing to get involved. The owning of the Euro is very difficult at the same time, and because of this – we are presently calling this a “scalper’s market”. The recent range of 1.20 – 1.25 should continue to be the boundaries for this pair, with the 1.20 being avoided like the plague. Because of this, we are basically seeing most of the trading in a 200 pip range above that bottom.
The trading of this pair for the long-term will be best served when the EU gets the debt crisis under control. This pair is set to possibly rise again anyway, as it is rumored that the Swiss National Bank is thinking of raising the “floor” form 1.20 to the 1.25 level and then perhaps to 1.30 in the end. The owning of this pair on the buy side could eventually be the trade of your career, but we need to see a reason to own the Euro first.