Talking Points:

  • The Swiss Franc is a currency that has lost much of its fundamental influence after the SNB pulled the plug on policy in 2015
  • With its role as a safe haven undermined by volatility, stimulus and banking secrecy eroding; CHF has become a neutral counter
  • There are few striking bearish CHF opportunities; but EURCHF, USDCHF, CADCHF and CHFJPY look primed if there is a reversal

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The Swiss Franc's Lack of Fundamental Influence

It can be difficult to trade a currency pair that has strong fundamental crosswinds. This past week, GBP/NZD was one of the most battered of the liquid crosses with the BoE and RBNZ rate decisions offering notable dovish updates and thereby competing to post the deeper retreat. The result for the pair was exceptional volatility and a larger wick. Ideal setups align a particularly clear weak (or expensive) currency to a particularly strong (or cheap) one. Yet, such clear and strong signals don't arise often - at least not well synced to technicals and combined momentum. The next best thing is to find a pair where one currency is motivated and the other is generally neutral. The Swiss franc is still one of the better foils to more motivated counterparts. That is due to its unique fundamental position in the spectrum and the aftermath of the SNB's decision to abandon its key monetary policy tool three years ago, which in turn scared motivated speculative interest off. Yet, we can use this lack of speculative influence to our favor when staging setups.

Lack of Motivation but Long CHF Trend Leverage EUR/CHF and USD/CHF Appeal

EUR/CHF Holds an Important Place in Evaluating Other Franc Pairs

If you are evaluating the Swiss franc or one of its major crosses, it always pays to keep an eye on EUR/CHF. This was exchange rate for which the Swiss National Bank attempted to hold a 1.2000 floor in order to secure exports to the European Union. It is still the most liquid exchange rate for the franc, and it is still the cross that the policy authority keeps track of when determining the bearing of its currency and whether its efforts are faltering. With the return to that previous 1.2000 floor, there has been a sense of 'mission accomplished' for the SNB to suggest that they have gotten their financial troubles under control. In reality, however, this is more likely a reflection of the struggle the ECB has had in keeping its currency under wraps. As the central bank heads towards an inevitable policy normalization, the Euro has gained through speculation. Yet, the central bank's delay on announcing material stimulus withdrawal and speculation in long-term policy shifts deflating; the Euro has started to retrace. As the world's second most liquid currency slides, there is limited capacity for the franc to fight the tide. EUR/CHF in turn can form the basis for a turn in the Swiss currency across the market.

Lack of Motivation but Long CHF Trend Leverage EUR/CHF and USD/CHF Appeal

A One-Sided Move Skews Opportunities

A look to an equally-weighted Swiss franc index shows the currency has dropped steadily over the past two years to return to lows last seen before the currency reopened after its extreme discount after the SNB shocked the market back on January 15, 2015. This trend establishes a remarkable, one-sided technical skew for this single currency and its subsequent crosses. Without a fundamental drive of its own, there will be a strong speculative pull to rebalance the franc after such a strong and persistent a move. It is certainly possible to extend this impressive drive, but a reversal is likely to prove more productive while an effort to extend the prevailing trend will come at a far more reserved tempo. Probability and potential eventually meet, but it is worth being patient for confirmation of the crossroads.

The Technical and Fundamental Merits of USD/CHF, CHF/JPY and CAD/CHF

While there are many appealing technical setups across the Swiss franc crosses, the fundamentals present very different opportunities. EUR/CHF could prove the defining catalyst for the currency against its major counterparts and the technicals are remarkably clean. Yet, there is reason to look around. USD/CHF has seen a remarkably strong rally over the past few months and a reversal from 1.0050 looks like an overdue and tense opportunity, but this requires at least a balance from the Greenback. That said, the currency has offered on of the broadest and most consistent bull trends in the past four weeks. That is a presumptuous call. From CHF/JPY, the drop has proven quite impressive - especially among the Yen crosses. For a rather passive CHF, we need some support for a rebound in risk trends to bolster the carry-motivated Yen pairing; but conditions are not particularly conducive to express risk appetite. Next to EUR/CHF, the most appealing pair is CAD/CHF. The Canadian dollar earned a recovery from an extreme low, but the subsequent rally (8 percent for this pair) looks particularly rich. We discuss the backdrop for the Swiss franc and the trade opportunities it is shaping in this weekend Quick Take Video.

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