Central bankers have moved the markets recently, and now we’re waiting to see what the economic data do to help guide us all into the next round of rate decisions. This week we hear from key central bankers but also learn how hot the US PCE inflation and key manufacturing data are. The USDCHF, for those who are fundamentally long the dollar, is in a great position for as long as the stop loss can be placed very tight to the entry. A move below last Friday's low mitigates any long thesis.
Forex Analysis
The US dollar is consolidating at the recent highs since the Fed pushed the rate hikes higher and spooked the markets into thinking that there is a distinct possibility of a recessionary phase to come. The EURUSD (orange) makes up a large part of the US dollar index (DXY) and has itself been battling with macro forces that include, rising inflation and an ECB about to pivot towards rate hikes, whilst Russian aggression against Ukraine and subsequent sanctions on Russian oil are leading Europe into an energy crisis.
Looking around the rest of the G7 forex for clues to which way the EURUSD may go and therefore the US dollar complex, the other key rate decision of late, was from the Swiss National Bank who made surprising moves toward ZIRP or maybe positive rates in the near future. Having been negative and accommodative in monetary policy for so long. The change in policy direction took investors and traders by surprise and the repricing of the CHF was dramatic. Remarks by SNB President Thomas Jordan that the central bank can use intervention in both directions and is prepared to sell FX if the CHF weakens added uncertainty. The USDCHF has an inverse relationship with the EURUSD, so a more hawkish franc would see the USDCHF potentially drop which could help support the EURUSD. If the SNB starts to sell euro-denominated assets that could lower the EURCHF rate towards parity and is also an indication to watch for if the euro complex weakens.
Looking at what happened last Friday on the USDCHF we see that the price action dipped below 0.95441 which is a significant low, but then closed back inside the previous trading range. This could have been a liquidity grab and that is confirmed with a higher daily close in the coming days. The USDCHF would accelerate lower if we take out Friday's low, as that is the path of least resistance and that could be instigated by any number of US dollar economic events this week, but most probably a worse than expected US PCE reading. If US inflationary pressures are more likely now to encourage the Fed to push the rate higher by 75bps, the market reaction was to push into the fixed income assets for safety against a recession. This helped drop the US dollar index and US dollar forex crosses.
The SNB is also adding to market worries by selling off its assets, which include US equities. Currently, the retail traders on the ActivTrader platform are reasonably balanced in their market direction for the Swissy. If they continue to become more bullish, that would be a leading indicator that the USDCHF is more likely to push down towards the 0.935 level.
Waiting until this week’s US PCE and US ISM data is out and the markets start repricing is one strategy, but with the look below in the USDCHF occurring last Friday at 0.95441, I favour a punt to the upside in the USDCHF, as the SL is easily placed below the Friday low and the target is asymmetrical all the way to parity and above and the relative equal swing highs around 1.0050.