CHF/JPY: Complacency to Fuel Demand for Safe-Haven Assets - 5 May 2020

Governments start to ease lockdown measures implemented to contain the spread of the Covid-19 pandemic, which has led to an increase in the infection rates without generating the hoped-for commercial activity. While the costs of stimuli and bailouts are unsustainable, in the absence of treatment, a balanced approach is needed. Permanent economic changes are required to ensure a healthy, sustainable recovery. Complacency over challenging adjustments is expected to fuel demand for safe-haven assets like the Swiss Franc and the Japanese Yen, with the latter a superior choice. The CHF/JPY was rejected by the bottom range of its short-term resistance zone, suggesting more downside is possible.

The Force Index, a next-generation technical indicator, converted its horizontal support level into resistance, pressured into a breakdown by its descending resistance level. It paused after reaching its ascending support level, as marked by the green rectangle. Bears remain in control of the CHF/JPY with this technical indicator below the 0 center-line. A new breakdown is pending, likely to ignite more selling pressure in this currency pair.

Swiss Finance Minister Maurer confirmed the government plans to spend between CHF70 to CHF80 billion on stimulus for the economy, approximately the same amount it deployed to bail out UBS during the 2008 global financial crisis. While Switzerland is in a more favorable financial position than Japan, the Swiss National Bank is also more active in direct market manipulation of the Swiss Franc. It makes the Japanese Yen the preferred safe-haven currency, adding a bullish catalyst to the CHF/JPY. Following the breakdown in this currency pair off of its short-term resistance zone located between 111.493 and 111.893, as marked by the red rectangle, bearish pressures expanded.

Enforcing the downtrend is the descending Fibonacci Retracement Fan sequence, and price action slipped below its 38.2 Fibonacci Retracement Fan Resistance Level. The CHF/JPY is well-positioned to extend its correction into its support zone located between 109.151 and 109.646, as identified by the grey rectangle. Given the deflationary threat in Japan, this currency pair is anticipated to remain confined to the established trading range unless a new catalyst results in a material change of the present outlook.

CHF/JPY Technical Trading Set-Up - Breakdown Extension Scenario

  • Short Entry @ 110.400

  • Take Profit @ 109.200

  • Stop Loss @ 110.800

  • Downside Potential: 120 pips

  • Upside Risk: 40 pips

  • Risk/Reward Ratio: 3.00

Should the Force Index accelerate above its descending resistance level, the CHF/JPY is favored to attempt another price acti0n reversal. Given existing fundamental conditions, the upside potential is reduced to the top range of its short-term resistance zone., enforced by its 61.8 Fibonacci Retracement Fan Resistance Level. Forex traders are advised to take advantage of it with new net short positions, wary of interference by the Swiss central bank.

CHF/JPY Technical Trading Set-Up - Limited Reversal Scenario

  • Long Entry @ 111.200

  • Take Profit @ 111.850

  • Stop Loss @ 110.900

  • Upside Potential: 65 pips

  • Downside Risk: 30 pips

  • Risk/Reward Ratio: 2.17

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Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.