USD CHF to parity and beyond

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).