EUR/CHF Showing Signs of Near-Term Top – What Does that Mean for Risk?

Volatility in the EUR/CHF has been subdued for years now, ever since the Swiss National Bank set an explicit floor at 1.20 in the pair. Despite the low volatility, the pair can still provide a useful barometer of risk sentiment in the market. Because the Swiss franc is still seen as a safe haven currency, the EUR/CHF tends to fall when traders are pessimistic about the global economy and rise when traders are feeling more optimistic. In fact, the price action over the last couple of days provides a clear example of that phenomenon: when traders were upbeat as yields and stocks started to break out midway last week, the EUR/CHF rose to a 2-month high at 1.2250. However, as equities and yields reversed back to the downside late last week and early this week, the EUR/CHF fell in turn.

At this point, the EUR/CHF is raising some near-term red flags on the outlook for global risk appetite. On a technical basis, the pair carved out a clear Evening Star* candlestick formation off resistance at the converging 100-day MA and 50% Fib retracement near 1.2250. This relatively rare 3-candle reversal pattern shows a gradual shift from buying to selling pressure and typically marks a top in the market. Confirming this signal, the pair’s RSI indicator just broke below its own rising trend line after finding resistance near the key 60 level. This price action suggests that the sellers still have the upper hand and portends a potential continuation lower over the coming days.

To the downside, bearish traders may look to target the lower 1.2100s, an area that marks the lows from early 2013, as long as the pair stays below its 100-day MA. More broadly, global equity and bond traders may want to exercise some caution unless EUR/CHF can regain its bullish mojo. Regardless, traders of all stripes should consider reserving some “chart space” on their trading computers for keeping an eye on EUR/CHF as a gauge of overall risk sentiment.

• An Evening Star candle formation is relatively rare candlestick formation created by a long green candle, followed a small-bodied candle near the top of the first candle, and completed by a long-bodied red candle. It represents a transition from bullish to bearish momentum and foreshadows more weakness to come.