Monetary Policy Concerns Could Impact EUR/CHF

| About: CurrencyShares Euro (FXE)


Monetary policy conditions still complicated for SNB.

Differences in Swiss industry sectors paint a picture that is largely supportive for the CHF.

Recent price trends create trading opportunities at nearby price levels.

As expected, the Swiss National Bank is persisting with the expansionary monetary policy. The primary rates will remain unchanged at -0.75% and the three month LIBOR range between -1.25% to -0.25%. Furthermore Thomas Jordan, Chairman of the Governing Board, conceded that the negative interest rates are going to continue for some time in the near future as well.

Switzerland, as a country, is in a phase of stimulating its economy. Switzerland heavily depends on its tourism and exports industry for economic growth. For the country to grow as rapidly as planned, it is essential for the Swiss Franc to remain weak against the Euro. A strong franc would render the exporters uncompetitive and force them to squeeze margins to even remain in business. This has prompted SNB's continuing participation in the currency markets.

Changing Price Floor

The SNB used to maintain an exchange rate peg between euro-franc till January this year. They entered the market whenever franc appreciated to more than 1.20 francs to a euro. Even though the floor rate has now been abandoned, the SNB still participates in the market to ensure an exchange rate in line with the economic growth.

Overall, the British vote to leave the European Union has resulted in a strong appreciation of franc against the euro. The currency which saw its steepest climb since January, stabilized a little after the authorities stepped in but is still believed to be overvalued. Here, we will look at some of that activity in chart form.

Chart View: EUR/CHF 4-Hour Time Frame

Critical Resistance 1: 1.10250

Critical Resistance 2: 1.09184

Critical Support 1: 1.07143

Critical Support 2: 1.05673

Trading Stance: Bearish (CHF Positive)


EUR/CHF Source: CornerTrader

After the massive fall in the EURCHF pair on 15 January 2015, the pair has rallied up for a larger correction in price. Currently, the price action scenario suggests that a correction is near its end and the pair is ready to move downward again with new momentum. In the 4-hour time frame, the 100-day moving average has crossed below the 200-day moving average, which suggests that the new bearish reversal in the pair could trigger at any moment.

The pair is currently testing the 100-day MA on the 4-hour time frame, so a clear break of the 100-day MA will give us a selling opportunity near the 1.09184 key resistance level. Conservative traders can wait patiently for more lucrative sell signals near the 200-day moving average (on the 4-hour time frame) or at the major resistance level at 1.10250. However, if the price action confirmation signal forms right at the 100-day moving average on the 4-hour time frame the pair is likely to fall into the major key support region near 1.07143. A clear and decisive break of this support level will bring deeper southward moves, with the pair likely heading towards the weekly support level at 1.05673.

Extended Horizon in CHF

These price factors are being supported by the extended fundamental horizon for the region. Because of its highly globalized economy, Switzerland's growth is affected by the economic conditions of specific nations. The gradual improvement in US and Chinese growth is good news for Switzerland. The exports, particularly the pharmaceutical exports, have recovered to some extent. Exports in other areas are expected to pick up as other nations' growth increases.

Switzerland, who declined membership in European Union, still remained a strategic trading partner of the bloc. With Brexit a reality now, Switzerland seems to fear that one of its most important trading partners, UK may slip into a recession. "Studies expect a recession in Britain due to declining trade and investment flows. This may last until 2020," the federation said in a recent statement. Even though the negative interest rate is not necessarily a good proposition for the savers, Jordan urged people to remain patient while the economy's growth rises.

He also urged the businessmen to focus on technological challenges and disruptive innovation, regardless of the policy changes. Jordan believes that capacity is one of the largest strengths for Switzerland and will continue to be a game-changer once Switzerland recovers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.