Is USDCHF Ready for a Breakout?Following a weak summer for the US Dollar, momentum has begun to pick up again over the last month as the chances of a December rate hike have increased and traders are starting to price this into the markets once again. In Switzerland, rates remain in negative territory and the Swiss National Bank seem committed to an expansive monetary policy. This policy divergence gives us a good reason to look for medium term buying opportunities on the USDCHF currency pair.
Recent bullish momentum on the dollar has been provided by hopes of a tax reform, easing geopolitical tensions and the potential of a more hawkish Fed Chair being brought in early next year.
Investors are hoping that Donald Trump will be able to bring in tax reforms in the coming months which could see the corporate tax rate cut from 35% to 20%. However, Trump will need to show Congress that his reform plans will be just as beneficial for middle class citizens as well as they would be for the top 1% in order for the legislation to be passed.
Earlier this week Trump interviewed John Taylor for the Fed Chair position as Janet Yellen’s term end is nearing. Reports suggest Taylor left quite an impression on him and this prompted traders to buy the dollar since John Taylor would be expected to be more hawkish than the current Federal Reserve leadership. However, it is also known that Donald Trump prefers lower rates and he will also be appointing members for the vacant seats on the Federal Committee. It is yet to be seen whether he will build a committee whose policy views are in line with his or not. At the beginning of 2018, this will be a key factor for the US Dollar.
However, despite these bullish factors supporting the dollar for now, history suggests that we may have entered into a long run bear cycle for the dollar. On average, USD bull cycles tend to last for 5-6 years whilst bear cycles last around 8-10 years. The most recent bull cycle for the dollar started back in 2011 and based on history, along with the bearish movement this year, that cycle looks to have finished. This suggests that any bullish movement on USD pairs may just be a retracement rather than any long term change.
In Switzerland, the central bank have said that they are committed to an expansive monetary policy due to Swiss Franc strength. A strong franc has been a major concern for the bank for some time and despite some weakness recently, sight deposits have not been dropping as fast as analysts expected which suggests that net long positions on CHF are still being held.
The Swiss Franc is one of three traditional safe haven currencies which is one of the reasons for the currency being so strong. The SNB continue to intervene in the currency market to control the currency strength and last year they were forced to cut rates into negative territory. The Japanese Yen, another safe haven currency is suffering with the same issue and despite rate cuts, investors will continue to purchase these currencies in times where a risk off sentiment takes over the market as it has done so multiple times this year.
On the technical side, USDCHF has been range trading for about 2 years between 0.94500 and 1.03500. Last month, the bottom of this range was tested and it looks as if long USD positions will take this pair to the top of range. Given the current fundamentals and sentiment, we do not expect any breakout of this range. The SNB are continuing with their current policy which would mean that movements on the Swiss Franc would be from sentiment rather than fundamental changes. The fundamentals in the US are strong with further rate hikes expected but inflation continues to hold back the economy. The next few months are a key time for the US dollar, economically and politically, and we would need to see some significant progress before considering a breakout of this currency pair. Based on the current data and information, we expect this pair to continue upwards and test the top of the range.
