CHF/NOK: Stresses in the Eurozone dominate near-term (Mon, Jul 25 2011)

CHF/NOK is currently dominated by movements in EUR/CHF. This can be explained by the range-bound nature of the EUR/NOK chart, as displayed immediately to the left. Thus CHF/NOK is being driven by EUR/CHF.
EUR/CHF is heavily influenced by stresses in the Eurozone periphery countries and in particular by Greece, Spain and Portugal. As the yields on the respective bonds issued by these countries rise, we see renewed weakness in EUR crosses generally, but in particular in EUR/CHF, as the Swiss Franc is being used as a safe haven.
The two charts displayed to the left in the lower half of the page, show 10 year Italian and Spanish government bond yields. We can clearly see that both are trading close to the upper bound of the last 10 years range. Also shown is the potential neckline of a longer-term reversal pattern, warning of potential for yet higher yields. Should a continued rise materialise, we can expect EUR/CHF to be pressured to the downside.
In fact a sustained break over 6% in both Italian and Spanish 10 year government bond yields will likely lead to a more lasting funding problem in both of these countries, with risks then of a bank funding crisis to follow. We will thus monitor these yields carefully and would advise any EUR/CHF trader to do likewise.

Assuming EUR/NOK remains rangebound, this should place more upside pressure on CHF/NOK. We also note that the correlation coefficient of EUR/CHF with CHF/NOK is -0.839 suggesting a very strong correlation. The causal effects are explained by the bullet points already covered.
In the absence of further strength imposed on the Swiss Franc via strains in the Eurozone periphery, we would favour a sharp reversal. It is thus our view that as long as issues remain with the economies in the periphery, then we will see further safe haven demand and a near-term continuation of strength in CHF/NOK.
Should these issues be resolved over the coming weeks and months we would expect a sharp reversal in virtually all CHF crosses due to the extreme long positioning that has been built up in Swiss Francs.
Focusing on CHFNOK in particular we note the formation of a rising wedge which ultimately should be a bearish pattern. However we expect a test of the resistance, currently near 6.9850 and then a break higher, ahead of any potential reversal.
Back under 6.2893 is required to weaken bulls in the near-term.