USD/CHF looks poised for breakout
Fawad Razaqzada May 17, 2018 3:24 PM
The SNB still charges negative interest rates and maintains that despite the recent weakening of the Swiss franc that the currency remains overvalued. This makes the USD/CHF fundamentally supported.
The dollar continues to find good support thanks mainly to ongoing expectations that the Fed will be tightening its policy more aggressively relative other central banks in the near term outlook. This is reflected in not only rising bond yields in the US, but also in the widening of yield differential between US bonds and those of Japan, Germany and UK. But among and possibly the most dovish of major central banks still out there is the Swiss National Bank (SNB). The SNB still charges negative interest rates and maintains that despite the recent weakening of the Swiss franc that the currency remains overvalued. This makes the USD/CHF fundamentally supported. With global stocks still buoyant, there is also less demand for safe haven assets at the moment. Gold, for example, has already broken below $1300 support and the Japanese yen has also been falling. The Swiss franc, which is also considered to be a safe haven currency, could join the precious metal and the Japanese yen in going further lower should the stock markets remain calm as they have been so in Europe.
Indeed, the USD/CHF’s v-shaped recovery and its recent consolidation near the previous swing high of 1.0037 is technically bullish. If resistance was strong here, then surely rates would have been slapped down again. But they haven’t. This is telling us that rates are more likely to break higher than break down, even if the USD/CHF appears to be overbought. If we are correct in our bullish forecast and see a break above the 1.0037/55 area in the coming days then a continuation of the rally towards the 127.2% Fibonacci retracement level at 1.0267 could be the outcome. This level comes in just ahead of the 2016 and 2017 highs, at 1.0342 and 10334, respectively. Those could be the subsequent bullish objectives in the event the bullish trend continues.
However, in the event the USD/CHF falls below support at 0.9985 first, then we would have to put our long term bullish view on hold, as in this case rates could go for a deeper correction before potentially breaking out. In this potential scenario, price could return to 0.9920 support area before rebounding. But we wouldn’t rule out the possibility of an even deeper retracement in this case.
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.