USDCHF looks poised for breakout

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.

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