USD/CHF off multi-week highs and back below 0.8900 for now

• USD/CHF continues to trend to the upside but has reversed back below 0.8900 after rallying as high as 0.8920.
• There are no notable economic releases in Switzerland this week; risk appetite and USD factors remain in the driver’s seat.

USD/CHF continues to trend to the upside and, technically speaking, maintains a bullish bias. However, the pair has reversed sharply after rallying to its highest levels in more than a month above the 0.8920 mark and now trades back below 0.8900. Right now, the pair trades with gains of just under 0.5% on the day or around 40 pips. 

The 21, 24 and 28 December highs which sit just below 0.8920 have thus proven to be formidable resistance for now. A break above this area could open the door to a move back towards a key area of resistance in the form of the November low at around 0.8980 and the 50-day moving average a few pips below it.

Driving USD/CHF today

The key factors driving USD/CHF higher were all to do with USD and, more broadly, the market's downbeat appetite for risk. On the latter, though US equity markets appear to have nearly managed to recovery back to flat on the day, it has otherwise been a broadly downbeat day (European stocks down, crude oil markets and industrial commodities down, risk-sensitive currencies such as NZD, CAD, NZD and EMFX all down). Concerns about the state of the Covid-19 outbreak in Europe, as well as over reports of new strains being detected in the US and Japan, and further deterioration in US/China ties with the former reopening more dealing with Taiwan have all weighed on sentiment.

Arguably the major factor hurting risk assets on the day though has been the rise in US real and nominal bond yields, which is seemingly sucking demand from all other asset classes into the US bond market to scoop up the higher yield. Inadvertently, this appears to be the major factor helping USD. But as noted above, US stocks are back to nearly flat on the day and USD is off highs (The Dollar Index or DXY is back to trading in the 90.40s having been as high as the 90.70s), seen in USD/CHF’s drop back below 0.8900 again from highs above 0.8920 earlier in the session.

Fundamental Factors to consider this week

A fall in Swiss Sight Deposits in the week ending 8 January was not enough to spur much of any upside in CHF; note that when Sight Deposits drop, that is typically seen as an indication of an SNB that is taking a more hands-off approach to the CHF (as when they intervene in FX markets to weaken CHF, Sight Deposits typically rise). Sight Deposits dropped to CHF 628.945B from 631.517B over the week before.

There are no further notable economic releases out of Switzerland this week, thus risk appetite and USD factors, such as rising US real and nominal bond yields, remain in the driver’s seat. Credit Agricole notes that “if sentiment were to turn more unstable from here, both, the SNB’s aggressive monetary policy stance and still excessive structural long positioning should keep any currency upside strongly limited from here”.

Other analysts point out political instability in Italy as one risk that could trigger some upside in CHF (which is seen as the main safe-haven for European political instability); the ruling coalition is currently mired in an intense disagreement over the use of the funding from the EU Recovery Fund, as well as whether or not to activate the ESM. A potential snap election is on the table, but most analysts think given the emergency nature of the situation right now, that would be wise. Still, if things start to head that way and the Bund-BTP spread starts to widen, this could give CHF some impetus from the EUR/CHF pair (i.e. it could also hurt the USD/CHF pair).

USD/CHF four hour chart