In their “Monetary policy assessment of 14 March 2013”, the Swiss National Bank (SNB) decided to leave the exchange rate of CHF 1.20 per euro unchanged. The SNB said that “the minimum exchange rate is an important instrument in avoiding an undesirable tightening of monetary conditions. The SNB will therefore enforce this minimum rate with the utmost determination and, if necessary, is prepared to buy foreign currency in unlimited quantities for this purpose.”
Last summer the SNB was a key mover of the global forex market. It was known to be buying tens of billions of euros each month, hoping to keep the franc weak to protect its exporters in the face of inflows from spooked overseas investors at the height of the eurozone crisis in May. Rumors abounded among forex investors that the SNB was buying Swedish krona and the Australian dollar. Bankers said there had been days when the SNB was the biggest single buyer of Australian debt. Figures released by the SNB later in the year confirmed the rumors; the proportion of “other” currencies on its balance sheet – the Australian dollar, Swedish krona, Danish krone, Singapore dollar and Korean won – rose.
The IMF is considering switching CAD and AUD out of the “other” category and listing them as reserve currencies in their own right. Analysts point to a rise in foreign ownership of these nations’ debt as evidence that central banks are buying in force. According to Nomura (a Japanese multinational conglomerate of financial services and financial management consulting who became famous in 2008 when it acquired most of Lehman Brothers Asian operations together with its European equities and investment banking units), the bank calculates foreign ownership of Australian government debt, rose from 58 per cent to 72 per cent.
On the other side, last summer, traders were looking for every comma to validate the hypothesis of QE3. Now the same traders are searching for any comma to ensure that the Federal Reserve will begin selling the bond holdings which is an equivalent of an QE exit. Regardless the FED measures the real economy in US (as Mark Trumbull presented in “The Christian Science Monitor&rdquo is looking like this: "family debt-to-income ratios have fallen out of the stratosphere. Improving home values mean many households have bolstered their net worth, banks feel able to extend more credit, and builders are starting to launch new construction projects. Business investment is on the rise. And for all the fiscal bickering in Washington, so far politicians have managed to avoid dire events like a government shutdown." The rise in the dollar is attracting more foreign investors wanting to own US assets that generate additional currency gain. Alan Ruskin, global head of currency strategy at Deutsche Bank, said: “We are getting back to a traditional cycle where the US is at the forefront of a recovery”. The US added a much stronger than expected 236,000 jobs in February and the unemployment rate fell to 7.7%, the lowest in more than 4 years. The market knows that the FED has linked its quantitative easing to weakness in US employment so signs of recovery are tending to underpin the greenback.
After all this being said my conclusions are:
1. SNB is prepared to buy foreign currency in unlimited quantities to defend the CHF 1.2000 rate so they have to SELL the CHF in unlimited quantities and that makes CHF weak.
2. Another way to defend the 1.2000 rate is to SELL the euro and buy AUD, SEK or something else (as they did last summer) and that will put pressure on euro, giving more strength to the USD.
3. A strong AUD despite the not so good macroeconomic signals from China and Australia might be a sign that SNB is "playing" the same card as in 2012 and is selling CHF or EUR and is buying AUD.
4. As Alan Ruskin said, the US is at the forefront of a recovery and what better way to trade the recovery of US and the defending actions of SNB if not long USD/CHF.
5. Traders, they all know (I hope) that long usd/chf is the other side of being bearish on eur/usd and looking at the macroeconomic situation in Europe I think we have strong reasons to be bearish on euro.
For a technical look at this potential trade idea I decided to use a theory that was born to predict the stock market action - the DOW THEORY, the Fibonacci retracement and the Elliot waves.
- In just a few words the DOW THEORY ( see http://en.wikipedia.org/wiki/Dow_theory) has some “rules” and I will use only the first one for my analyze and I can assure you that even the other 5 works as well as the one that I chose.
1. The market has 3 movements
2. Market trends have 3 phases
3. The (stock) market discounts all news – in my opinion works the same for Forex
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended
Before using the first rule of the DOW THEORY I would like to have a look at a monthly chart to have an idea on where we are now with this pair:
On august 2011 we had the lowest rate on usd/chf for the last 25 years –0.7066, and starting from that date seems that the market reversed and entered in a bullish trend. Bellow you have a weekly chart to see better what in my opinion is the reversal of a trend.
Now let’s have a look at the DOW THEORY on this chart: the green arrow in my opinion is the main movement (the first movement of the “rule&rdquo. The primary movement or major trend may last from less than a year to several years. It can be bullish or bearish.
The red arrow can be the second movement of the theory. The "medium swing", secondary reaction or intermediate reaction which may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement.
And finally the blue arrow is the "short swing" or minor movement which varies with opinion from hours to a month or more.
The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.
You also should note the Higher Lows (highlighted with red) and Higher Highs(highlighted with green) on a weekly chart.
Some traders can say that this main movement can be a “medium swing” in the bearish trend that started on October 2000 (see the first chart above) but I name this movement as a start of a long bullish trend based on the fundamentals that I wrote about at the beginning of this article. And also you will see in my next approach is supported by 2 other technical analysis.
In my next analyze, also weekly, I used the Fibonacci retracement and the Elliot Waves on the same chart as you can see below:
In this moment, the usd/chf rate action is on 23,6% Fibonacci retracement which in the past was a support (see the red spots on the chart) and now became a resistance (the green spots).
The Elliot wave principle is that that market prices unfold in specific patterns. The market prices alternate between an impulsive phase, and a corrective phase on all time scales of trend. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between impulsive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
So what I think that this pair is doing now, is completing the wave 5 and after that the Elliot’s corrective first wave should bring the price action back to the 23,6% Fibonacci retracement to retest that important line.
If the macroeconomic data remain unchanged, and nothing unexpected happens, I think being long on Usd/Chf could be a good opportunity to make some green pips. Traders just have to find a good entry point. Good luck !