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USDCHF May be the Best Dollar Bullish Option for Trade War Status Quo

USDCHF May be the Best Dollar Bullish Option for Trade War Status Quo

2019-07-02 01:09:00
John Kicklighter, Chief Currency Strategist

USDCHF Talking Points:

  • My focus for a positive turn for trade wars after the G-20 meeting was USDJPY owing to the Dollar and risk-linked benefits
  • The actual outcome for trade relations following the summit was more 'status quo' which present serious doubt on risk trends
  • For a counterpart to the Greenback that aligns to a scenario of passive strength, USDCHF may offer a better overall mix

See how retail traders are positioning in USDCHF and USDJPY along with the other major Dollar-based majors using the DailyFX speculative positioning data on the sentiment page.

This week's top scheduled event risk didn't even take place within the 7-day time frame. Rather, the two-day G-20 summit in Osaka, Japan concluded on Saturday; so the first opportunity to respond to its outcome wasn't until liquidity was restored on Monday. While there were a range of points under discussion, the principal concern in this meeting of leaders was the state of trade - both across the globe and specifically between the United States and China.

As with most known events with heavy potential for fundamental impact, I evaluated the various scenarios to see if there was particular opportunities that could be pursued should the market conform to the logic. For a worsening of trade wars, my focus was gold - outside of the FX space as the implications for traditional fiat stability would be far more severe than any individual opportunity or detriment amongst the majors. Alternatively, my preference for an improvement in relations between the two nations was for a USDJPY rally. The combination of an improved outlook for risk trends would favor buoyancy behind all Yen crosses while the Dollar would stand to benfeit the relief afforded to the currency at the center of all the trade war pressure.

Chart of USDJPY and Opening Gaps (Daily)

USDCHF May be the Best Dollar Bullish Option for Trade War Status Quo

Ultimately, the latter pair responded in line with the assessment after the stakes of the meeting were tallied. Technically-speaking, USDJPY put in for a very provocative move with a gap higher on the open of the week that would clear resisance on a desending trend channel. While this is an impressive response, I am concerned with the potential of follow through. The outcome of the G20 was not in fact a true improvement for the state of trade around the world. Instead, it was an unexpected status quo - whereby the US didn't follow through with escalations but negotiations would continue into the future - which will struggle to tap genuine conviction. That is a particularly difficult trend to sustain against the backdrop of a liquidity drain for the holiday week.

USDCHF May be the Best Dollar Bullish Option for Trade War Status Quo

A potentially better candidate for this particular middling outcome with a strong technical response for the Dollar and some motivation to see a countercurrency contribute to the mix is USDCHF. For the Swiss currency's part, we have recent headlines that Swiss stock markets have effectively lost direct access to EU investors. While a financial cap, this will not likely upset the Swiss National Bank (SNB) which has struggled to keep the local currency capped through policy efforts in an effort to leverage growth. There is also a modest connection to risk trends with the Franc playing a different, but more appropriate haven for recent circumstances, which could benefit from a coast higher in risk that also doesn't tie it down should it falter (both currencies are sought in safety for different reasons).

Chart of USDCHF and 1-Day Rate of Change (Daily)

USDCHF May be the Best Dollar Bullish Option for Trade War Status Quo

Ultimately, this is a Dollar-based major that aligns more naturally the technicals and fundamentals than the likes of the EURUSD, USDJPY or NZDUSD. However, USDCHF doesn't override the practical limitations of liquidity - a factor of what I consider 'market conditions'. If the liquidity drain between structural complacency, Summer doldrums and the week of the Independence Holiday in the US tames all markets, this pair would similarly lose traction.

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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