USD/CHF: to parity and beyond?

<p>It is not a bad habit to look at the monthly charts every now and again just to remind ourselves about the underlying trends, and […]</p>

It is not a bad habit to look at the monthly charts every now and again just to remind ourselves about the underlying trends, and when better than at the start of each month. A month is indeed a very long time, and for that reason a lot of the market noise gets eliminated on this time frame and therefore the underlying long-term trends become clearer to observe. These long-term trends are established because of some underlying fundamental reasons; technical analysis can be used to identify such trends. Given that this is a nonfarm payrolls week, the focus will obviously be on the US dollar. The greenback has established strong long-term bullish trends against most currencies due to expectations that the Federal Reserve will be the first major central bank to increase interest rates as the US economic recovery continues at a moderate pace.  If this week’s incoming data supports this view then the buck could really start to accelerate, especially against currencies where the central bank is uber dovish, such as the euro and Swiss franc.

So, ahead of this week’s US data, we are analysing the monthly chart of the USD/CHF and by the looks of things, a major breakout above parity could be on the cards. Besides the bullish fundamental reasons (hawkish Fed & dovish SNB etc.), there are a number of technical factors that support this view. For a start, a trend line that goes back all the way to the year 1985 has been broken down already in the summer of 2014. Since then, the USD/CHF has had a couple of attempts to break decisively above the previous support-turned-resistance at 1.0000. These attempts have proved futile so far, but the corresponding sell-offs have been progressively shallower. The most notable drop below parity was at the start of this year of course when the SNB abandoned its 1.20 EUR/CHF floor. That drop caused havoc in the market. But amidst the chaos there was in fact some order as the USD/CHF found support from the upper side of its long-term bullish trend line, around 0.8400. Consequently, higher lows and thus a bullish trend line have since been established. Meanwhile the secondary momentum indicators are both pointing higher: the MACD is above zero and the signal line, while the RSI is hovering around the key 60 level. The latter is yet to break its own long-term bearish trend; it will need to do this in order to confirm the breakout in the USD/CHF.

Zooming in to a daily chart, in figure 2, one can immediately notice that the previous resistance area between 0.9800-0.9840 has been broken and that this has so far offered support in today’s session. On this time frame, it will be a bearish outcome if this support area breaks, so the bulls will need to hold their ground here. If the Swissy rallies from here then there are little further resistance until parity. Thereafter resides a Gartley Double Top formation, around 1.0075-1.0130. While we would normally be looking for signs of weakness here, in this case, we would be looking for a potential breakout due to our fundamental bullish view. If realised, then significantly higher levels could be achieved as some of the existing sellers rush for the exits, starting with the Fibonacci-based targets at 1.0300 (161.8% of BC price swing) and then 1.0415 (121.2% extension of the XA swing).

15.11.02 usdchf monthly 15.11.02 usdchf daily

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.