CHF: What’s Going On & Why You Shouldn’t Short EURCHF
Note: This article is part of the Free Profitable Forex Newsletter, first sent on April 15, 2022. You can subscribe 100% FREE here and timely get these trade signals and analyses every week in your inbox.
There is currently little going on in the Fx market other than the strengthening US dollar. This is especially the case after last and this weeks’ declines in the commodity currencies (i.e., AUD, NZD, CAD), and now it is really only the USD left that is going up versus the rest.
Thus, it pays to stick to the trend. The dollar is underpinned by a multitude of bullish factors, primarily the hawkish Fed, and these trends will not go away for a while. The odds favor further USD strength against most other major currencies, with EURUSD looking poised to move toward 1.05 and USDJPY toward 130.00.
Our trades sent in recent weeks are generally all working well (see the stats at the end of this email for details). Maybe you were even able to capture a better profit on these though we closed some of the trades earlier or the stop was triggered at breakeven.
Trading will stay quiet today due to the Easter Good Friday holiday, which will likely extend till Tuesday next week as Monday is also a holiday in many parts of the world. So, in today’s edition of the newsletter, we’ll not send a new trade idea; and instead, we’ll use this opportunity to discuss the longer-term outlook for the CHF currency and what lies ahead for the coming months.
And as usual, we’ll review the outlook for the major EURUSD, GBPUSD, and USDJPY currency pairs in the weekly analysis (this time published on Tuesday). So stay tuned for that.
CHF Will Not Weaken while Europe is in a Major Crisis
During much of 2021, we considered the EURCHF and USDCHF pairs as potential long-term bullish trades. However, a lot has changed since then, and those no longer look like good trades, at least for the time being. In particular, the EURCHF pair has been in a steady downtrend after it broke below that 1.07 - 1.08 support area last September. It seems this was no coincidence as it was last autumn when Europe’s problems started (with rising gas and electricity prices) and reversed the then-existing gradual uptrend in EURCHF.
The strong performance of the CHF is not a surprise for a risk-off environment like the current one. The CHF has fared similarly well in past years whenever there was a big Eurozone-specific crisis as its safe-haven appeal attracts flows while money is moving out of the rest of Europe. The bullish EURCHF view in 2021 was based on hopes that Europe will keep growing at a steady pace (following massive Covid vaccinations) and that the Eurozone is becoming a more united entity as a whole. But things clearly stand very differently now, with new risks (other than Covid) on the horizon. The EU has major energy and economic crises to deal with, plus a war on its Eastern border. This has already caused a broad decline in the euro currency, which then accelerated following the actual outbreak of the war in February.
As one of the preferred currencies to hold for investors when the euro is falling, the Swiss franc looks set to continue its solid performance. If it wasn’t for the SNB intervening against its strength, the CHF would have probably been much stronger by now. However, even the SNB is greatly reducing the interventions compared to the past (i.e., 2010-2015 period), and that explains why EURCHF now trades close to parity (1.00) instead of much higher like 1.20 back then.
So, the current situation really just demonstrates again that Europe’s structural issues need to be solved before the CHF can be allowed to weaken materially. In 2017, Macron’s win in the election and much brighter growth prospects for Europe started a strong uptrend in EURCHF. This time around, the French presidential election is barely on the radar as the war in Ukraine dominates investors’ attention. And unfortunately, the war in Ukraine is turning into a prolonged conflict with little to suggest an end is near. With that in mind, the bearish outlook for the euro currency remains intact, which will continue to put upward pressure on the Swiss franc. This means that the EURCHF pair could soon revisit the parity area and can even break below it toward 0.95 or 0.90.
Should you go long CHF (short EURCHF)?
Despite the bullish backdrop for the CHF, we can’t recommend opening a long position (e.g., short EURCHF). That is mainly because the SNB continues to dislike CHF strength and is still referring to the currency as “highly valued.” As the saying goes among Fx traders, you never want to fight a central bank. If you want evidence, just look at a chart of EURCHF in September 2011 when those EURCHF shorts who were fighting the SNB got burned badly.
So, despite the bearish EURCHF outlook, it still seems like a very risky trade to think about shorting (because of the SNB). We deem it is better to wait for things to turn and then trade this pair from the long side when the time comes.
EURCHF & USDCHF Chart Analysis
Finally, let’s look at some charts to see how we stand in the longer-term technical context of the two main CHF pairs.
Below is the weekly EURCHF chart, and here we can see a downtrend extending from the 2018 high. Yikes! The rally in 2020-2021 driven by the hopes for a more united Europe looks like a retracement within a larger bear trend on this chart.
Also, mark that 1.00 (parity) level in EURCHF. As can be seen, the support line of this 4-year channel stands close to this zone. In addition, as mentioned above, the SNB could still decide to intervene against CHF strength by selling francs in the open market. The parity level could also be a significant line in the sand for them, so such interventions could intensify below this level. It should be noted here that the SNB never publicly discloses at what levels it intends to intervene, so we would really be trading in uncharted waters if EURCHF pushes below 1.00.
And while EURCHF is falling, the strong franc is largely keeping USDCHF in a range since last summer. While it is currently near the highs of that range, a big breakout here is hard to envision without EURCHF also turning up.
USDCHF could continue the gradual grind higher tough driven by dollar outperformance and the divergence between the hawkish Fed and the SNB.
Trade signals from the past weeks
- March 10, 2022 (entry after ECB) - Short EURUSD from 1.1040, ½ position already closed near first target at 1.09; stop on remaining ½ position moved to breakeven, targeting 1.08 and below (trade open in progress)
- March 28, 2022 - Short GBPUSD from 1.3130, exited at 1.3070 after upside break of trendline this Wednesday = +60 pips profit
- April 1, 2022 - Long CADJPY from 98.30; closed stop triggered at breakeven (Apr 7) = 0 pips
- April 13, 2022 (entry after RBNZ meeting) - Short NZDUSD from 0.6820 (in progress)
TOTAL: +60 pips in the past week
TOTAL: +5310 pips profit since October 1, 2018
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