Potential signal:
- I am putting on a new long at 1.1015, with a stop at 1.09 and a target of 1.1250 or more.
- The British pound continues to see buyers against the Swiss franc, as the carry trade continues.
GBP/CHF
The British pound rallied initially during the trading session on Tuesday against the Swiss franc to peak above the 1.0950 level. That being said, we have since seen the market pull back just a touch, showing signs of hesitation, which is not a huge surprise considering this is the fourth positive day in a row.
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That being said, the interest rates still favor the British pound pretty significantly, and therefore, I am looking at this as a market that I am only buying. I have no interest in shorting. I do not wish to pay the swap at the end of every session, and as long as the carry trade is somewhat in vogue, it makes sense to stay to the long side if you have a position at all.
Ultimately, the market is going to continue to see a lot of volatility and a lot of questions asked about the Middle East, as well as other geopolitical concerns and inflation. So, all of this together means that risk appetite might be a bit fluid. The Swiss franc, of course, is considered to be a safety currency, so that does come into the picture here. But you also need to look at the reality that if the interest rate will stay as wide as it currently is, it's very difficult for the Swiss franc to pick up any real traction.
Carry Trade Dynamics and the 1.10 Breakout Level
Breaking above the 1.10 level is what I'm waiting to see, and if we do in fact break above there, I would get aggressive in my approach to buying the pound over the Swiss franc. I am also shorter the Swiss franc in other pairs, so I would have to keep that in mind, but the carry trade is boosted by the fact that the Swiss National Bank is staying the course of a zero interest rate policy.
And as long as that's the case, the Swiss franc will be used as a funding currency for some of the carry trade positions out there. The Bank of England is somewhat stagnant right now at relatively higher rates, and therefore, it makes this a nice candidate for that carry trade. That being said, it does look like we're a little bit tired in the short term. I'll look at any pullback as a potential opportunity.
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