Forex trading is a rough and fast paced business, and I feel obliged to update readers of sum drastic actions (relatively) that I took overnight during the Asian session. I closed all risk oriented positions, naming my short USD/MXN and long AUD/JPY. I took some losses on the former, but it turned out to be an excellent strategic retreat. The greenback surged nearly 800 pips against the peso this morning, in line with the risk off sentiment gripping the markets. Likewise, I closed AUD/JPY at cost, a move that was also well timed since AUD/JPY is down big this morning as the deterioration of risk appetite has slammed the Aussie and buoyed the Yen.
My motivation for this reshuffling was two fold. First, I saw lack of conviction in the latest risk-on moves in the both the S&P 500 and the FX market, as evidenced by big gains followed by even larger pullbacks. Secondly, the recent carnage has presented a rare opportunity to make a big move with limited downside. EUR/CHF has been trading in the 1.2150-1.22 range, kissing an overnight low of 1.2117. Because downside is limited to the 1.20 cap set by the SNB (Switzerland's central bank), there exists a great opportunity for some highly leveraged arbitrage. Specifically, I plan to trade around a core long position of EUR/CHF and with orders on the way down towards the 1.20 firewall. The very modest positive carry, along with the simple mechanical fact that this pair can really only go up, makes it possible to employ much more capital, with a chance for great gains and limited downside. Even leveraged 50:1, the pair could drop to the floor and I would still have nearly twice the required equity to cover the margin. That's not to say I shot all my bullets at once however. Right now I am all in on EUR/CHF, with a 10:1 debt to equity ratio. I will target 1.23 in the short term, and if EUR/CHF goes down, I'll buy more.
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