Buy CHF/JPY Above 97.273

The Franc-Yen pair is particularly unique among the major currencies, as it represents two of the major safe haven currencies. The pair moves primarily on one gauge in markets denoted by risk-aversion: origin of sentiment. The Franc has had a remarkable run the past few months, but the primary driver of Franc strength has been those exposed to European assets seeking haven nearby. On the other hand, the Yen gains when global sentiment is risk-averse, not just Europe. As such, despite European sovereign debt contagion worries weighing on the markets, the risk of a U.S. government default has created widespread panic over the past few weeks, leading to the markets reallocating funds in favor of the Yen. However, as it now appears that the European situation is only temporarily resolved, as per the most recent bailout of Greece, and the U.S. crisis is on the verge of resolution in the next week or so, the CHF/JPY pair appears primed to test its Range Top once more before a potential breakout.

Levels to Watch:

-Range Top: 98.500 (Trend)

-Range Bottom: 95.402 (100-DMA, Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart below shows the Fibonacci extensions and how the CHF/JPY pair trend could unfold in the coming days, off of the May 13 Low at 90.138, the June 3 High at 96.444 and the extension to the June 20 Low at 94.120.

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Long: Place an entry at 97.273 (50.0 Fibo)
• Stop: Set the stop to 96.276 (100-pip risk)
• Target 1 (Risk/Reward Ratio): 98.017 [61.8 Fibo, move Stop to 97.273] (74/100, 0.74)
• Target 2 (Risk/Reward Ratio): 98.500 [Range Top, move Stop to 98.017] (123/100, 1.23)
• Target 3 (Risk/Reward Ratio): 100.426 [100.0 Fibo] (315/100, 3.15)
• Timeframe: 6- to 12-days

Trading Tip – Although the pair has traded in an ascending channel for the better part of the last two-months, it has carved out an approximate 300-pip sideways channel over the past three-plus weeks, after setting an all-time high during last Monday’s Asian trading session. As noted earlier, once the U.S. debt crisis finds resolution, market participants will turn their collective eye back towards Europe, leading to eventual Franc strength across the board, and an unwinding of long-Yen positions as the markets reallocate capital towards the ‘safest’ safe haven currency. Similarly, after finding support on its Range Bottom and 100-DMA last week, the pair appears primed to move higher, even after the Franc’s incredible strength on Monday. The daily RSI is climbing once more, from 50 on Friday to 59 today, while the Slow Stochastic oscillator supports further gains, issuing a buy signal today, with the %K greater than the %D, at 51 and 45, respectively. The MACD Histogram appears primed to issue a bullish divergence, with the differential at -4, from -11 on Friday. The MACD crossover will confirm our buy signal, likely to occur above the 50.0 Fibo at 97.273.

Event Risk for Switzerland and Japan

While there is a heavy volume of data due out of Japan, the same cannot be said for Switzerland, as it only has two data releases in total on the week. Regardless, both currencies play major roles as hedges against risk, so according to where the risk originates from – the Euro-zone or the United States – each currency will find strength or weakness in varying ways.

Switzerland – The week ahead has very little data to show out of Switzerland; Swiss data rarely if ever has a long-standing impact on the markets, as it is now the financial markets’ hedge against uncertainty, similar to the role Gold has taken in the past few months. As such, the Franc will gain irrespective of data on the docket, so long as risks of contagion and a U.S. debt exist.

Japan – This week features many significant data releases for Japan, an unusual occurrence for the Pacific Rim nation. The significant data begins to trickle in starting on Wednesday, with the bulk of the data being released on Thursday. Retail sales data leads the block of data releases, following by a measure of manufacturing later on. However, the two most important releases, industrial production data and inflation data, come out on Thursday; it is unlikely that these data will have much of an impact on the Yen, as the currency is currently considered a store of safe haven in times of crisis, so amid the debt problems ramping up in the United States, the Yen will be bid high on poor news, especially out of the United States.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report or be added to his distribution list, please send inquiries to: cvecchio@dailyfx.com

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