Add to CHF/JPY Long at 98.017

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 (Trend)

Updated Chart

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Chart from July 25, 2011

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

• First Entry: Entered at 97.273 (50.0 Fibo)
• Add: Place an entry at 98.017 (61.8 Fibo)
• Stop: Set the stop to 96.276 (100-pip risk on First Entry)
• Target 1 (Risk/Reward Ratio): 98.500 [Range Top, move Stop to 98.017] (123/100, 1.23)
• Target 2 (Risk/Reward Ratio): 100.426 [100.0 Fibo] (315/100, 3.15)
• Timeframe: 4- to 8-days

Trading Tip – Although the pair has hit its first entry target at 97.273, and recently touched its first profit target of 98.017, the pair has since backed, and an opportunity to add at 98.017 exists. It appears, despite today’s rally, that there certainly exists some opportunity to the upside for the pair, as evidenced by the trend of the technical indicators this report follows. The MACD Histogram’s bullish divergence continues to widen, now at +6 from -5, at the time this report was first published. Similarly, the daily RSI continues to push higher, now at 62. Also supporting the notion of further gains for the pair is the trend of the Slow Stochastic oscillator, which has the %K greater than the %D still, at 76 and 74, respectively. As such, with further Franc strength likely on the horizon given the fundamental outlook, the technical picture supports the trend.

Event Risk for Switzerland and Japan

Data is thin next week in terms of significant data out of Japan and Switzerland, although given the current state of global economic affairs, as well as a rate decision and inflation data on the docket next week, volatility is likely going to be high among Franc- and Yen-based pairs.

Switzerland – The week ahead has a handful of important data releases out of the landlocked European nation, with inflation data on Friday headlining the week. Regardless, as the United States creeps closer to the debt ceiling deadline, investors will become increasingly fearful of risk, and as such, the Franc will gain irrespective of data on the docket.

Japan – Although the Pacific Rim nation has a rate hike on deck for the coming week, considering the underlying economic conditions in Japan – low growth and low inflation – there is no reason for the central bank to shift its current monetary policy. As such, markets will turn their collective eye towards the commentary following the rate decision.

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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