USD/CHF – Another leg higher
On 16 June, the Swiss National Bank (SNB) decided to hike 50 bps to bring policy rate to -0.25%. This quickly induced a 1.0065-1.0060 bearish double top pattern. USD/CHF dropped 5.5% to trade a 0.9495 low. In similar fashion, EUR/CHF edged lower by 5.4%. Both declines were knee jerk reactions, but their future paths would diverge given the move on EUR/CHF will be a directional structural shift that reflects the 4% pa difference in Eurozone-Switzerland inflation profile (as we argued the EUR/CHF bearish case on 26 May EUR/CHF: Maintain bearish stance).
The SNB has abandoned CHF appreciation as a policy plank and in its efforts to moderate inflationary pressures, FX intervention is now a two-faced coin. The SNB has accumulated an estimated CHF775b of foreign currencies since 2009. Simply unwinding these would surface in price cycles when the CHF is deemed too weak from an inflationary stance. The bulk of the increase in Swiss headline inflation is generated from import prices, and besides an expected 25 bps hike at its 22 September policy meeting, the SNB is likely to tolerate nominal CHF strength relative to its main trading partners. The Fed is generally expected to hike 75 bps and 50 bps for its July and September policy meetings. Hence, come September the Fed’s Funds Rate Upper Bound (currently at 1.75%) will see a 3% divergence between USD and the CHF. USD/CHF traded down to 0.9495 but its fleeting moment with the 100-day moving average (dma) at 0.9525 has been brief and shallow. The technical indicator is now flashing signs of stability as USD attempts to move back into the cloud pattern that would negate the SNB-induced knee jerk reaction.
On the weekly chart, the recent decline saw a 0.9495 low before stabilising – this could keep USD in a buy-on-dips mode given there has been no sustained loss under 0.9473 (a prior significant high) and the pivotal 40-week moving average at 0.9442. This can conform to a simple price sequence of 5 moves 1-2-3-4-5. Utilising a simple Bollinger Band set-up on the daily chart, we derive the trappings of a 0.9417-0.9992 boundary.
We add a bit of colour to the navigation map. USD’s decline from 1.0237 fell within the norms of an impulsive five-legged 1-2-3-4-5 decline to reach a 0.8758 low in early January 2021. USD bounced back on a falling wedge reversal, with a bout of indecision masked within a triangle pattern that ran from March 2021 to early January this year. The corrective legs of abc are in play and as long as USD does not sustain losses under 0.9442-0.9417, there remains a missing leg of v to the upside. The momentum gauge, the ADX DMI has a low -DMI reading of 15.3.
On the four-hourly chart, USD/CHF is attempting to regain poise and reverse bearishness in what looks like a flag pattern. This is bearing in mind a USD move that retraces 76.4% of the most recent USD drop (around 0.9919).
The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.
The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.
The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.
DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.
To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.
The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.