FX Update: USDCHF Resting At A Key Multi-Month Trend Support

On Monday, my colleague Kristian Siggaard-Jensen published a FX Update, where he drew attention to the somewhat subdued ranges in EURUSD in the month of September from a recent historical perspective. (For details, please see FX Update: EURUSD September still narrower than usual.) In an earlier piece, we had also mapped out the main reasons why we still have an upside bias for EURUSD in shorter term horizon. (For details on this, please see After the fireworks: Where does the USD go now? )

EURUSD positive near term upside dynamics still intact
Two key developments since our last week's update have emerged that could have potentially been game changers for the EURUSD in the near term horizon: A) St. Louis Federal Reserve President James Bullard's comments last Friday on a Bloomberg television interview refired a whole new round of speculation on now a possible October or December round of Fed tapering decision, and B) A possibility of a new long-term refinancing operation (LTRO) by the European Central Bank (ECB), which we had also alluded to in our posting last week, gained further traction following ECB President Draghi's dovish comment on Monday.

While the markets are at best fatigued in following Fed's overall contradictory communication, and the initial shock effect from Bullard's comments have already somewhat faded and given way to speculation on the approaching deadline for US debt ceiling discussions, the growing possibility of a new LTRO has not dealt a significant blow to EUR. With the pair's moves still largely guided by relative monetary policy differentials, we maintain the view that in the shorter term horizon EURUSD still has more upside potential.

USDCHF sitting at a key support level
With our positive near-term outlook for EURUSD intact, we now turn our attention to the technical developments in USDCHF where the downside scope in USDCHF has been gradually increased with the EURUSD upside potential materialising. Please note that these two currency pairs have a high degree of negative correlation, as can also readily be seen in correlation table of this website.

The Swiss franc is still overvalued from a fundamental purchasing power valuation perspective against the Euro. With no foreseeable changes in the Swiss National Bank's near-zero policy rates or its commitment to the 1.20 floor in EURCHF, and also with the risk of safe haven flows into Swiss franc reversing in a scenario of steadily accelerating global recovery, risks for EURCHF are thus skewed to upside. Despite upside risks in EURCHF, with the dollar likely to remain subdued in the near term, we see further advances in EURUSD still paving the way open for lower levels in USDCHF.

As can be seen from the chart below, USDCHF is now sitting on a significant support level, with an impending test of a multiple month trend line support. A successful weekly closing below this line could quickly and potentially translate into a potential departure from a range established since the early 2012. This break would also pave the way open towards the 0.9022 support area, which marks the 2012 lows. A close below this level would in turn open the gates for further downside in the pair, with the next big support area coming in at 0.8860, a 38.2 percent retracement level in the 0.7065-0.9972 wave.

USDCHF sitting on a multi-month trend line support

At this juncture, we also find good value in buying short dated USDCHF-puts that would to encompass the break of the key 0.9022 support level. More on the key USDCHF technicals as well option specific information will follow on our next option trade idea for this pair