Let's be (Swiss) Franc

In a rather under-the-radar fashion, the Swiss franc is quietly on track for its sixth consecutive bearish week against the US dollar. In fact, the both the widely-followed franc pairs are approaching very significant lows, with the USD/CHF hitting a fresh 2.5-year low this morning and the EUR/CHF approaching its lowest rate since January 2013.

The historical view of the Swiss franc as a stalwart “safe haven” currency may be less relevant now that the SNB has set a hard floor at 1.20 in the EUR/CHF, but traders still rush to buy the currency when there are major economic concerns…and the market has two big concerns right now:

1) Ongoing Weak Chinese Data

The first concern is the potential that China, the world’s 2nd-largest economy, may be slowing down. We wrote about this issue at length earlier this week, but traders just took another “triple gutshot” from the Chinese economy with the release of three weaker-than-expected economic reports.

Industrial Production, Fixed Asset Investment, and Retail Sales all slumped to multi-year lows during today’s Asian session, increasing the risk that China may be seeing a broad-based economic slowdown. Comments from Chinese Premier Li Keqiang that the economy faced “severe challenges” in 2014 seemed to validate the market’s fears and fan speculation that the country’s central bank may ease monetary policy soon.

2) Imminent Crimea Secession Vote

Meanwhile, there’s been no progress on any sort of agreement between Ukraine and Russia over the Crimean peninsula, which is set to vote on seceding from Ukraine this weekend. If anything, positions continue to harden ahead of the referendum, with US President Obama promising “consequences” if Russia does not back out of Crimea and the interim Ukrainian Prime Minister vowing that the country would “never surrender.”

Both of these situations have prompted global investors to focus on the return of their capital, rather than return on their capital. In the FX market, this means that traders tend to sell their higher-yielding and emerging market currencies in favor of perceived safe havens, including the Swiss Franc. As long as these dynamics remain in play, especially if we head into the weekend with no prospect of reconciliation over Ukraine, the CHF could continue to catch a bid.

Technical View: USD/CHF and EUR/CHF

Looking to the USD/CHF chart first, rates peeked down to a new 2.5-year low at the .8700 level earlier today. However, there are two converging Fibonacci support levels that may be able to put a floor under the currency pair in the near-term. The 127.2% Fib extension of the early January rally (AB) converges with 161.8% Fibonacci extension of the modest bounce we saw last week (CD) at the .8700 handle. As long as that level holds, the potential for an oversold bounce back to the 13-day MA (currently around .8817) remains intact. However, if that floor is breached, the USD/CHF may continue to fall all the way down toward the October 2011 lows near .8600 next week.

Shifting gears to the EUR/CHF, the technical picture is a bit more balanced. The pair is currently holding above last week’s lows, which marked a clear bullish divergence in the Slow Stochastics, indicating a possible meaningful bottom. The lows from February and April of last year are also in the 1.2130 area, presenting an area of strong previous support. If we do see rates bounce from here, the next major level of resistance is the 38.2% Fibonacci retracement around 1.2215, a level that also marks last week’s highs.

Given the generally more constructive view of the EUR/CHF, traders who believe that concerns about China’s economy and Ukraine/Russia are overblown may want to focus on bullish opportunities in that pair; conversely, more pessimistic traders may prefer bearish trades on the technically-weaker USD/CHF, especially if the .8700 floor is broken.