Delicate Times In FX -- Here's Why

Delicate Times in FX

While the macro backdrop suggests dollar bulls do not have much to go on, the charts tell a much more coherent story.  One cannot argue price action; it is what it is, and right now the dollar is moving higher.  A decent amount of dollar bears are likely causing the lift off as they run to cover and the weekly chart of the dollar is looking poised to break a two-year downtrend, a close at current levels (89.70) will give the signal, technically speaking that a breakout is in force.

The Swiss Franc (CHF) continues to bear the brunt of the selling.  It would appear that traders/investors are casting off beliefs of heightened terrorist threats even ahead of the Republican Convention next week.  The next target is 1.2860 on CHF.  This too is on the verge of setting a weekly breakout pattern.  This is having obvious implication on our short EUR/CHF position.  While the EUR is weak, the fact is, the CHF is more so.  When we initiated this position, this was the precise reason I decided to scale into the trade; this has proven to be a good choice so far.  A close below 1.5412 today would certainly help our cause.

For those of you who may be interested in some macro thoughts on EUR/CHF, I have included this quote from UBS:

The Swiss National Bank has recently argued that rates need to rise from their current low levels as the output gap is closing and the recovery is becoming broad-based. UBS expects the SNB to raise rates 25bp by the Sept. 16 meeting and another 25bp by December - this is not fully priced into the market, yet. Rising rates in Switzerland would make short-term euro investments less attractive, helping to push EURCHF lower - potentially to the 1.5200 area.

In the past, EURCHF has been driven by both expected EUR-CHF rate differentials and global growth expectations. These two indicators are significantly correlated with moves in EURCHF spot. Regressing EURCHF with the expected yield differential and stocks-to-bonds ratio (which rises when growth expectations rise), we find that spot should move lower from current neutral levels. We believe that rising rates in Switzerland should become the dominant theme, which should squeeze the EUR-over-CHF rate premium, leading EUCHF lower.

It is becoming quite clear, that regardless of rate differentials widening and overall economic activity picking up relative to Europe, the recent weakness in USD/CHF is adversely affecting our trade.

NZD/USD

Despite the solid rally in the dollar this AM, the NZD has held in remarkably well.  The yield on the 10-year bond has dropped below 4.20%, widening the rate differentials between the US and New Zealand once again.  This is likely the reason it has held firm.

Technically speaking the 50-day ema continues to be the foundation from which further long positions can be built.  I am keen on this pair and feel that there are some opportunities for us to take advantage of the recent pullback.

This week the RBNZ meets to discuss and decide rate policy.  The market widely anticipates and has priced in yet another 25 bp hike.  The key of course will be the jobs report here in the states a week from today.  Absent an upside surprise (needed to maintain dollar rally) the NZD seems to have good bids behind it.

As always, feel free to send me your comments and questions and please join me on September 9th at 1:30 PM PDT for a FREE conference call on FX trading, simply click here to sign up. 

Dave