EURCHF Trade Idea March 2020

Jumping straight into the GDP differentials between the Euro and the CHF in the past few years the GDP has gone from a negative differential to a positive differential. This can be seen from the low of 2013 for the blue line and the high of 2019. During this period, we saw the EURCHF exchange rate slightly appreciate. The most recent data has shown a slight decrease in the differential by 0.3% which is quite negligible but we’re still in the positive differential zone meaning we’re still slightly long based on this indicator. Overall, I would score it a positive 1. If the trend continues in the favour of the Euro, we could start to see a long-term uptrend forming.

Interestingly I’ve chosen DAIGn probably most commonly known as Mercedes Benz to analyse against the EURCHF exchange rate. This is because Switzerland’s major trade partner is Germany who use the Euro as their currency and who also produce cars (Mercedes Benz) which account for 7% of all Switzerland’s imports from Germany.

As we can see from the chart above, we have a negative correlation with DAIGn and the EURCHF. Over the past 6 months or so DAIGn share price has been falling significantly with the EURCHF following, strange for a inversely correlated asset class.

Nonetheless, we’ll continue with our inverse relationship and score it accordingly. Since the most recent change in data shows a -1.09% decrease in value for DAIGn we can score it as a +2 on our score for the relative analysis on EURCHF. If it was positively correlated, we would have scored it a -2 but in this case due to the inverse relationship we’ve given it a +2. This is a slight long bias in our overall analysis.

Another company we’re going to analyse against the EURCHF is BAYER AG. Bayer AG is a German multinational pharmaceutical and life sciences company and one of the largest pharmaceutical companies in the world. Why is this important? Switzerland import 12% of packaged medicaments from Germany so it would make sense to account for a huge pharmaceutical company like BAYER AG. Again, like with most stocks and currency exchange rates we have an inverse relationship. So, we can start scoring it accordingly.

Currently from last month BAYER AG has only depreciated in value by 0.14% which is very negligible. Therefore, we’ve scored it a 0-neutral score in our scores. In the past 3 months however there’s been a 10% negative change meaning if the trend continues and BAYER AG continues to fall in value the EURCHF inverse relationship may see an appreciation!

Since we’re analysing the CHF paired up with the EURO, we can’t miss out a major commodity which is gold. Why is it so important? Switzerland gold exports and imports account for a whopping 25%! So, this is a major commodity to analyse when considering CHF pairs.

Since the worlds stock markets haven’t been performing particularly well recently due to black swans such as the Corona Virus there’s no surprise gold is doing quite well. The most recent data shows a 2.20% increase in the value of gold since February. This is scored as a -1 a slight short bias due to the inverse relationship of gold and EURCHF.

What we may see in the future is gold hit the same highs around the 1750 level, world stock markets and the Corona Virus lighten up which causes a depreciation in the Gold value and thus an appreciation in EURCHF.

We have also analysed the interest differentials between the two countries however, there is little change in the interest rates, so we’ve scored it a 0. Ideally, we would want an increase in the interest rate differentials between the ECB rates and the SNB rates to give us a higher confirmation on longing the EURCHF.

Straight away when analysing the major stock index in Europe and the EURCHF we can see a very strong negative correlation. This inverse correlation shows that when the EURO STOXX 50 falls the value of the EURCHF exchange rate rises.

Based on the most recent high of December 2019 at the price of 3479.74 and the current price of 3120.11 there’s been a drop-in value of 10.33%. If we score this inversely this gives us a score of +9 on our scorecard as we expect the EURCHF exchange rate to start rising in the future. Especially if stocks continue to depreciate, this is potentially supported by worldwide reduction in consumer demand for products due to corona virus and the EURO STOXX 50 hitting a resistance level near the 3500 mark.

Overall, the relative analysis we’ve scored it at 22. This is then added onto the positive euro score and subtracted from the CHF score. Overall giving us a net long bias for EURCHF with EUR having a +54 score and CHF having a -49 score.

Due to the risk off environment, it is a much more volatile time to trade with some factors being completely overshadowed by market sentiment. For example, if Corona Virus got worse it could affect huge manufacturers in the Euro region which could end up causing a depreciation in the Euro value. So, it’s a good idea to keep an eye on unexpected events moving forwards.

The Euro sentiment on hedge funds currently is not in a position we think makes it a higher probability trade. Ideally, we would like hedge funds to be at least creeping towards a positive flip (over the 0 line). Keep an eye on the COT indicator on our COTA page to find a good time to enter your position as right now it’s higher risk as your idea will be against the market.

The CHF COT data shows that hedge funds are net long with decreasing open interest. If this continues in the next few weeks and it heads towards the negative side we could have more confidence going forwards but right now the market does not agree with our idea so it’s high risk.

The technical and price is in an interesting spot for the EURCHF exchange rate. It’s just hit a major level which saw buyers in 2017 appreciate the value of EURCHF significantly. If the same holds true and the big players also start to buy EURCHF we may see a huge upwards trend in the future. Right now, it’s a bit early with early signs of daily pin bars but not much else to support the idea.
 

What we’ll be waiting for are things like daily higher highs and bullish confirmations on the fundamentally driven idea. Followed by market sentiment being in favour.
 

If the technical signs do start to show, it is possible to enter the position with a low risk starter position to see if it plays out. If you’re more conservative you can fully wait for the COT report to agree with your idea, but this may not happen for a long time so it will most likely have to be re-analysed if you wait for that confirmation.

Remember all our LITA members can analyse currency pairs like this after completing our Forex masterclass and using our technology to make things quicker.

Our most recent trade ideas are going fairly well with NZDCAD nearly hitting a 1:3 risk reward.