The USD/CHF currency pair, which expresses the value of the U.S. dollar in terms of the Swiss franc, has pushed lower recently as Swiss franc demand has proved more robust than the demand for U.S. dollars. In a recent article of mine, I noted that the 0.9250 level remained insight (when the market price was just over 0.9400. Since then, USD/CHF has taken the 0.9250 level, and fallen even further to take out its March 2020 low.
The drop below the March low may not (in itself) be an important signal, as markets do often gravitate towards levels such as these which typically attract plenty of stop-loss orders. Popular stop-loss/take-profit levels can generate liquidity, as orders are automatically closed out at these levels. When these levels are taken, this can also generate further volatility in the same direction (which is why it is usually not a good idea to place stop-loss or take-profit orders “only slightly” away from these more obvious levels).
Yet the move lower, below the March 2020 low of circa 0.9182, could signal further selling interest. However, the EUR/CHF chart perhaps proves that it is not necessarily CHF strength that is dragging USD/CHF down, but rather USD weakness. If it were CHF strength, we would expect EUR/CHF to also be falling, but this is not the case.
The almost unidirectional chart above shows EUR/USD staged a clear comeback. The pair have clearly exceeded the reactive high that was found in March 2020, which was produced by falling global equities and a sharp, mechanistic demand for euros, as short-EUR and “leveraged-long U.S. equity” positions were unwound. As discussed in a recent article of mine, markets are pricing in a lower USD premium as traders and investors question the carrying value of U.S. dollars in light of high liquidity, reduced market risks, and U.S. rates now at the zero lower bound.
The U.S. Federal Reserve’s current short-term rate remains at a target range of 0.00-0.25%, which is not too far away from the deposit facility rate of the European Central Bank (often used as a comparable rate) of negative -0.50%. In other words, with a high USD premium still priced in (in terms of purchasing power parity, as discussed in my previous article referenced) and yet very little carry-trade appeal (due to the tight interest rate spread) means EUR/USD still has plenty of room to push higher. A significant U.S. bounce-back relative to Europe, and/or a significant shock to European political or economic stability, would likely be needed to reverse this course.
Of course, we could see the trend slow down, with levels consolidating in the shorter term. But if we think about the longer-term prospects of EUR/USD, there is no significant reason why the pair could not find similar levels as found in early 2018 (above the 1.24 handle).
DXY, the U.S. dollar index, is heavily skewed to EUR (in terms of measuring USD’s international value). While this is somewhat outdated (based on historical international trade), the importance of EUR still remains very important to USD value. The euro is the second-most demanded world reserve currency after USD, and as such a stronger euro is likely to reflect USD weakness across the G10 FX space (and often beyond).
Risk sentiment is largely still constructive, especially with extremely low-interest rates driving investors into non-cash instruments (including equities), likely in part in an effort to protect their purchasing power. Positive risk sentiment reduces safe-haven demand, but low (or negative interest rates) could also help to reduce CHF liquidity (likely more than USD liquidity), since the SNB’s rate remains the lowest among the G10 nations, with a short-term rate of -0.75%. Negative rates are essentially a tax on liquidity and can (somewhat paradoxically) increase the values of these currencies since liquidity can drop as investors seek alternative ways to park their cash (such as in positive-yielding assets, like equities).
The interest-rate outlook for USD/CHF is likely to remain in favor of USD, but in terms of spot prices, we might even bias CHF over USD. In any case, even with a neutral view, EUR/CHF is likely to remain fairly steady within ranges; yet with EUR/USD strength, we would probably continue to expect USD/CHF to give up further room to the downside. This is not a short-term outlook, as short-term adjustments may stage minor rallies, but a gradual decline to the 0.8300 level (last seen in January 2015) for USD/CHF is not off the cards.
This is bearing in mind that USD/CHF is already trading below its 2018 lows and indeed in line with the lows of 2015 (excluding January 2015, the month in which the EUR/CHF was broken, which created a sharp readjustment that favored significant CHF strength, which was unfortunate for the Swiss economy). Without a significant change to the status quo, USD/CHF would appear to remain bearish longer term.
USD/CHF LONG (Buy)
ENTER AT: 0.915