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The third week of June 2022 has been very intense in terms of market volatility. We have had interest rate announcements from most of the main Central Banks around the world, and some of them have been quite surprising.
In short, we can say that the situation is this.
All the Central Banks around the world are increasing their interest rates to fight an unprecedented rising inflation. There are only two main Central Banks that are not following the same plan: the European Central Bank (controlling the EUR supply) and the Bank of Japan (controlling the JPY supply).
The most interesting announcement, from my point of view, was the one affecting the CHF. The Swiss National Bank (SNB) decided to increase the interest rate from -0.75% to -0.25%. For macroeconomists, or even traders who follow the Economic Calendar, this came as very surprising news, as the expectation was for the Central Bank to keep the rate at -0.75%, so very hard to imagine an increment, let alone an increment of 0.50 basis points!
This is also more surprising, if we consider that the SNB hadn’t been raised the interest rate since 2007!
So what happened?
After the interest rate decision, CHF immediately skyrocketed, taking hundreds of pips on several currency pairs. GBP/CHF, for example, went down by 280 pips during the 30 minutes after the announcement.
In an economic-political scenario that was already in favour of a historical neutral currency such as the CHF, the decision on the interest rate made some CHF-based currency pairs hit new lows/highs.
At the moment, during the 4th week of June 2022, GBP/CHF is very close to an all-time low, while CHF/JPY already hit an all time high.
So what to do?
Prices are very appealing for an investment against the CHF, but that’s not the only positive factor. With an interest rate that is still very low (-0.25%), most investments against the CHF currently give a very nice positive SWAP rate. For example, ForexVox currently pays almost half pip a day in SWAP for holding a USD/CHF long position overnight. Triple SWAP is paid on Wednesday, which means that you get paid around 182 pips a year just for holding a long position on USD/CHF for a year.
What are the risks?
First of all, buying a currency with a higher interest rate than the one you are selling is a trading strategy called carry trading.
The main risk in carry trading is that Central Banks can change the interest rate over time and so the broker changes the SWAP rate accordingly.
So, if you open an investment now on USD/CHF so you can get 0.5 pip a day as an interest, this can change if one of the two Central Banks decides to revisit their decision on the interest rate. Of course, it can go either way, in your favour or against you.
Generally, Central Banks take decisions on the interest rate every month, but they are mainly called to confirm the current rate, rather than applying any change to it.
Of course, a second and obvious risk is that the price moves against your trade. We have mentioned that a long position on USD/CHF should guarantee you a profit of about 182 pips a year only in SWAP interests. What if the price goes down by 200 pips or even more? Then the profit from the interests collected would not be enough to cover the losses from your trade and you would still end up losing money.
How to trade it?
It’s important to recognise that this can be a good opportunity to get involved in the Forex market with a long term investment, but it is equally important, if not more, to assess the risks that come with this trading idea.
To curb the main carry trade risk of a negative change in the interest rates, I will invest in GBP and CAD against the CHF. Both the Bank of England (BoE) and the Bank of Canada (BoC) have stated that further increments of their interest rate will follow. This should guarantee a positive SWAP rate over a long period of time.
Also, I chose CAD because it is the second best performing currency in this 2022, and GBP because, after a very negative period in May 2022, during June, it started to show good signs of recovery.
I will start by investing a small amount and I will adjust my investments as the macroeconomic scenario evolves.
You can follow my trades here: https://www.mql5.com/en/signals/1567934?source=Site+Profile
Best of luck for your trading!