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Can The Rally in Franc Continue?

Last updated 9/3/2010 4:13 AM ET (GMT -5) 10 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Swiss CPI printed at 0.0% today a bit softer than the 0.1% expected suggesting that price pressures in Switzerland remain muted as result of the strength of the Swiss franc.   This was the fourth month in row that CPI data has printed negative or flat, hinting at some possible deflationary developments in the Swiss economy, but the SNB is unlikely to be concerned about the latest reading given the healthy growth in GDP.

Yesterday,   Switzerland reported GDP growth at 0.9% versus 0.8% while Retail Sales soared 4.8% versus 2.3% forecast as the country continues to benefit from the recovery in Eurozone, most specifically Germany which accounts for 20% of Swiss exports.   The positive economic news has reduced the pressure on the SNB to intervene in the currency markets in order to stem franc’s rise. Throughout the summer the SNB has tried to no avail to slow down its currency’s appreciation losing billions in the process. It appears to have abandoned all such  efforts or now.

The Swiss franc has been   massive outperformer this year, with some analysts now calling the currency the “new deutschmark” due to the strength of the Swiss economy, its massive reserves and its traditional status as a safe haven instrument. Indeed, given the strength in the underlying economy, the SNB under normal conditions would have already moved away from it ultra accommodative monetary policy, by raising rates from their record low of 25bp. However, the persistent rise in the franc has curtailed   any tightening measures, and the strength of the currency itself appears to have curbed any nascent inflationary pressures.

For now Switzerland is enjoying the best of all worlds as its economy continues   to expand     despite the strengthening franc . However, if EZ growth begins to wane into the end of the year while at the same time EZ sovereign debt concerns return,   accelerating the fall in EUR/CHF the economic picture for Switzerland may no longer look so benign as the country’s critical export sector could face a much more challenging environment in 2011.   The SNB would then face a much more difficult task of combating the rise of an already record high Swiss franc as growth begin to slow. That’s why we believe that despite their earlier failures in the summer, Swiss monetary officials may be forced to act again if the EUR/CHF pair hits   1.2500 and USD/CHF brakes parity.

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Comments (10)

NeoFX

September 03, 2010 at 08:52 AM ET

Gentlemen,

Not sure how the numbers turned out in the NFP this morning, but from the looks of AUD/USD, they must've been bad as the pair shot up 70 pips (and the USD/CAD down 100 pips). Yet the usd/jpy is actually up, but that pair's always had a mind of its own anyway and I don't always get it.

Still, on the AUD/USD, as I mentioned yesterday, the 86% fib ret from the .9200 high still held @ .9160, thus once again proving the existence of this last fibonacci level. That's exactly where this rally this morning stopped.

Again, not sure what the numbers where, but technically speaking, this pair could be shorted till about .9050 for now in my opinion.

After that, all bets are off as the AUD/USD may acually target the .9400 high again. Strange things happening with this pair.

Neo

ScottyJeff

September 03, 2010 at 09:32 AM ET

...Neo,

NFPs were way better than expected. The AUD is acting as one would expect, given the incrementally decreased chance of a global double dip and the AUD's high beta nature. The .9160 level holding does not "prove" anything, anymore than the 42.9% fib ratio proof I posted last week. A number cannot be a Fib retracement if it does not come from the golden ratio .618.

All of these statements are verifiable facts. Contrast them with your false and/or lazy assertions.

Scott

MHW

September 03, 2010 at 09:33 AM ET

Neo, if you had a clue about fundamentals you would know that AUD/USD
blasted higher after the NFP release because this report, at least on the
surface, exhibited better than expected economic data.

"Better" U.S. economic data = better (higher) U.S. stocks = better (higher) Aussie

NeoFX

September 03, 2010 at 10:37 AM ET

You're right, I don't have a great grasp of how all these news are related.

either way, these movements still seem to always fall within these levels, they just seem to get reached faster on fundamental announcement days such as these.

Since the numbers were actually better than expected, then it makes sense for the AUD/USD to start falling now as I said above (which was the 86% and last fib ret from the .9200 high)

room down till .9050 is all I'm saying. We'll see

Neo

MHW

September 03, 2010 at 10:53 AM ET

Like Boris and many others have said, both traders and investors should be better
off making good use of both fundamental and technical info rather than only fundamentals
or only technicals. I bet even Warren Buffet sneaks a peek at a chart from time to time.

NeoFX

September 03, 2010 at 12:23 PM ET

I must concur.

Yet, it doesn't change the fact that the USD/CAD just came down from a perfect double top to the back side of the broken trendline, and also at perfect fibocanni convergeance @ 1.0430.......to the pip I must add. Should resume its uptrend from here.

Moreover, the AUD/USD coming down from its hit of the 161.8% D ext of latest up ABCD.

And what's more important, since we're in "fundamental mode" this morning, they both coincide with a strong greenback (for now, anyway).

But again, the technical strategy had this movement pegged from the get-go,


Look at Brad's trade yesterday on the USD/JPY:

he reccommended a sell @ 85.04. At the time the pair was trading @ .8410 area. Now this set up was based on a bearish gartley, which required the pair to rally up to the sell point, which happened to be the 61.8% of the latest downtrend.

Now, this morning, with the good news for the dollar, the pair did just what this set up expected:

it sky rocketed to the sell point and plummeted back down.

see it yourself: draw the fibs from A @ 85.90 to B @ 83.64, and see the ret came up to the 61.8% @ 85.04 and headed back down.

Surely it got there much faster than it usually does due to the announcements: but it still respected the pattern and the fibonacci levels.

So again, I respect fundamentals.....as everyone should. But the key is to understand what picture they paint on the charts because ultimately that's what you'd have to go off of whether you like it or not. You can't just say I'm buying or selling the greenback without proper stop loss and profit targets.

Neo

MHW

September 03, 2010 at 01:19 PM ET

"Now, this morning, with the good news for the dollar..."

Neo, now I see what your problem has been! You've been reading your charts upside down!

NeoFX

September 03, 2010 at 02:03 PM ET

and ScottyJeff,

there's no need to be childish and say that this analysis is "lazy/false". My analysis is what's been taught and observed for decades. You're directly disrespecting all of the body of work that has gone into this art form and science for years.

I'm not doubting what your'e saying, though I'd still like to know how you exactly make money in this market, if you make any at all.

But I've worked very hard to learn how these charts work for you to call my methodology "lazy." It's an "analysis," and as such it requires time, effort, and study. It's anything but lazy believe me.

Neo

P.S. At least I try to back my reasoning but.... What is your methodology exactly? How do you apply what you know to make money?

You should be ready to back up your "knowledge" of fundamentals with a proven trading strategy and methodology. All I've seen so far from you has been a bunch of obscure economic chatter with no strategy behind it....

ScottyJeff

September 03, 2010 at 02:42 PM ET

"Not sure how the numbers turned out in the NFP this morning...Again, not sure what the numbers where(sic)"

These comments are, by definition, lazy analysis. In the time it took you to write that, you could have looked the figures up and at least made an attempt at intelligent analysis.

It's false that the movement in the AUD "proves" the existence of the 86% fibonacci level. This is simply cherrypicking data that backs up your arguments (look up confirmation bias, it can have a huge effect on trading). Note you cherrypick Brad's JPY trade as an example of technicals overpowering fundamentals but ignore Roger's AUD trade, which was stopped out this morning, even though they are the exact same pattern.

The way I trade is very similar to Brad and Roger's methodology, which is why your arbitrary modifications hit my nerve so far. The issue I have with your "recommendations" is that you rarely include a stop level, confidently proclaiming AUD will go to .88. You act like the shills on CNBC who quickly forget losing trades and loudly toot their horn on their lucky guesses.

As for profits, I am up since I started trading 7 months ago, but not enough to quit my day job. I am (and will forever be) a student of the market, and quite frankly, it is very difficult to maintain consistent profitability in a zero-sum game. That's why I remain humble, I suggest you try it.

NeoFX

September 03, 2010 at 04:48 PM ET

to each his own I guess. ultimately pips do the talking as far as I'm concerned.

Good luck
Neo

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.