Potential signal:
- Just bought with a stop of 0.7890 and a target of 0.8050
- USD/CHF consolidates near a potential floor as dollar weakness stabilizes and SNB intervention risk limits downside.
- Interest rate differentials favor long positions, keeping the pair near a familiar value zone despite recent softness.
The US dollar has been somewhat stable against the Swiss franc during trading here on Friday so far, but when you look at this chart, it is not a huge surprise. We are still in the midst of consolidation, and we have had a couple of negative days here in the dollar against the franc, so a little bit of a bounce back makes sense.
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In fact, we are seeing the euro stall as well. That ties into the same theme that the interest rate decision on Wednesday did not really change much in terms of how market participants view the Federal Reserve or the US dollar. There was a mention of $40 billion a month being bought in short-term T-bills in the United States, which is, in theory, quantitative easing, but it is more or less for bank reserves and not necessarily to stimulate the economy. The market may have gotten that wrong, and we will have to wait and see.
SNB Intervention Risk and Long-Side Bias
This is a bit of a unique situation with the dollar and the Swiss franc because the Swiss National Bank has explicitly warned that it is watching the Swiss franc and its exchange rate. Maybe not so much against the dollar as against the euro, but there is a definite floor at the 0.79 level. If we break significantly below there, the Swiss National Bank will likely intervene sooner or later.
The market is very aware of this, and therefore, we may be closer to the bottom than the top. The interest rate differential still pays you to hold this pair to the long side, and because of that, buying is starting to look attractive again. This has been a rinse-and-repeat trade all year, and as we get close to that value area, there is no clear reason to think it will fail.
If it does fail, that is simply part of trading; you take the loss and move on. If things get too negative, the Swiss are likely to start shorting the franc against the dollar and the euro. The Swiss National Bank is one of the quickest central banks to act in this regard. That being said, whether or not the market can break above 0.81 remains the real longer-term question.
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