Central Bank interventions in the currency market are generally aimed at keeping the relative value of the domestic currency in line with monetary and economic policies of the country involved. Such interventions normally lead to significant and unexpected movements when measured against the average Daily and Weekly market ranges of most currency pairs. This was evident on September 6 when the market reacted to the SNB`s declaration to defend a 1.20 rate for the EURO CHF, sparking an immediate depreciation of 10.0%. While many may believe that future Swiss Franc weakness will be due entirely to the SNB, there are others who believe that it was already on the cards, based on the natural laws of Fibonacci prices.
When currency pairs are found to be moving in sync with Fibonacci Prices on the Monthly Charts, these targets tend to lead to major price reversals. This appears to be the present scenario for the EURO CHF which has been rallying since it breached the major Fibonacci target of 1.0839 last month. Given the precedent of similar rallies at Fib targets in 2008 and 2010 for this same currency pair as well as for the GBP CHF, it is very likely that the overall depreciation that will take place since the downtrend ended will be due more to this technical price point being hit. A brief look at how these Fib waves are formed and detailed examples using these previous occasions will support this assertion.
There are many opinions about how these Fibonacci waves are drawn, so I will describe the method that I have found to be most accurate and which appears to be the one that the EURO CHF obeys.
In the graph below, we see that each wave consists of 4 points. The first point that we can call point A, represents the first high of the downtrend. The connecting point, B, is the corresponding low of that high. We then use the Fib tool by placing it at point A (0.0%) and connecting it to point B (100.0%) from which we get the D or 1.618 (161.8%) price point. Point C is the turning point (Fibonacci Retracement number) that leads to the resumption of the trend. After each wave is completed, the next wave continues in the following manner.
- The new point A is now the Previous turning point, C.
- The new point B is now the Previous D (1.618).
MONTHLY CHART – EURO CHF
Looking more closely at these waves that took place in earlier years for the EURO CHF, we notice that the rallies at two Fibonacci targets were similar to the one currently taking place. In the first instance, the currency rallied by 11% from its low of 1.4296 to the high of 1.5879 between October and December of 2008 after hitting the 1.618 of 1.4415.
MONTHLY CHART – EURO CHF- 1ST FIB WAVE
During the next wave that continued the downtrend, the currency rallied once more between September and October of 2010 after hitting the 1.618 at 1.3012. From the low of 1.2765 to the high of 1.3833, the Swiss Franc depreciated by 8%.
MONTHLY CHART – EURO CHF- 2ND FIB WAVE
Similar movements according to the Fibonacci waves have also been evident for the GBP CHF. After two of these waves were completed, this pair has also hit the latest 1.618 at 1.5002 in August this year. As it did from December 2008, the Swiss Franc is also expected depreciate against the British Pound for a few months this year.
MONTHLY CHART – GBP CHF
Given the adherence of the EURO CHF to the Fibonacci waves as defined, it is therefore not surprising that a similar rally has been taking place at the latest 1.618 level. The latest wave in this downtrend produced the new target of 1,0839 which the currency overshot by some 800 pips, due perhaps to more aggressive safe-have buying of the Swiss Franc. What sets the present rally apart from the others, however, is the larger size of the reversal so far even before the SNB statement. Between the low of 1.0065 and the high of 1.1972 in August, the Swiss Franc had already depreciated by 19%. It is therefore quite possible that the ultimate rate of depreciation over the next few months will be quite significant in relation to 2008 and 2010.
MONTHLY CHART – EURO CHF- 3RD FIB WAVE
From the foregoing, we can conclude that the current rally has been due mainly to the latest Fibonacci target being hit and that the one-day depreciation on September 6 was just playing its part to fulfil the pre-determined path of Swiss Franc weakness. As to how far this reversal will go and whether this is the start of an uptrend is left to be seen. This is going to be determined by the factors affecting the global economic outlook, especially for Europe and the United States and the strength of safe-have flows relative to the SNB`s armoury and resolve.