GBPCHF Fundamental Analysis
There’s been lots of news on the recent corona virus outbreak causing very volatile environments in the financial markets. One of the key takeaways from such a pandemic is that it causes risk off for investors. This means they take their money out of riskier assets like riskier currencies and put them into safer assets like the safe haven currencies or bonds.
Therefore, our current analysis has a black swan which can definitely impact the likelihood of the ideas until the virus is contained. So, until the virus is contained investors and traders alike should be adopting a similar risk off mindset but once signs are starting to become healthy of vaccines or containment methods working effectively you may see risk assets become more attractive for investors as they anticipate business and consumers to act normally again.
Overall, we’ve chosen to start with a GBP pair GBPCHF this is because the Logic Strategy scores are showing a weaker GBP and a strong CHF.
The GDP differentials have shown 0.1% value with a 0.2% change since the previous year. This is a fairly neutral outlook on the GBPCHF exchange rate as both countries are performing at similar levels of GDP. Ideally if we’re looking for a long idea we want the base currency (GBP) to be a higher GDP than the quoted currency (CHF) and vice versa.
Taking a look at the imports Switzerland buy from the UK we can see overall that Gold is an influential factor. The gold asset takes up 66% of all imports from the UK which therefore decides whether we include that in our analysis.
On the flip side Switzerland also exports a lot of gold to the UK and medicinal products. Therefore, we could also include some pharmaceutical companies from the UK in our analysis to see what products they’re buying and selling.
Taking a look at GSK which is a major UK pharmaceutical company and comparing it against the GBPCHF exchange rate we can see that since 1990 the exchange rate has been decreasing but at the same time GSK has been appreciating. Overall showing an inverse correlation and relationship between the two assets.
Based on the monthly distribution of the changes in value of GSK we can see the underlying extremes and most common changes in values for GSK. We consider this when analyzing the asset as anything in the extreme portions can create extreme scores. For example, the most recent value for GSK was a -9.19% change with an inverse correlation to GBPCHF we’ve scored it at a +8. This could mean we see a short-term spike in GBPCHF moving forwards.
Again, earlier we mentioned gold was a huge factor to include in the CHF analysis as it accounted for 66% imports and 33% exports. Just by taking a quick glance at the graph you can see a similar relationship as the last, an inverse relationship between gold and GBPCHF. This means when the price of gold rises the exchange rate is likely to depreciate.
Taking a look at the monthly distribution we can see the underlying outliers which could be interesting if it scores there. The most recent value showed a -4% drop in the value of gold which is interesting in a risk off environment. This comes under a +4 score for our GBPCHF analysis of gold as it’s an inverse relationship we want to be scoring it positively if there’s a negative change. What we can expect in this steep drop in the price of gold is an upcoming short-term spike in GBPCHF. A potential correction in the overall downwards trend you can see in blue.
There’s no surprise that the FTSE100 is not performing well. Global stock markets are on the decline with the anticipation of no business due to customers not being able to go outside and businesses being forced to close to help stop the virus. Countries like China, Iran, Italy and Spain have all been forced into lock down stopping all movement and business. This hurts stocks because they can’t make money so investors pull the money out the stock market into a safer asset.
What we can see from the FTSE100 vs GBPCHF is that again there’s a negative correlation between the two assets. More specifically, there’s been a -30% drop since it’s previous high! That’s a tell tale sign of a potential bear market in play for stocks which means USD up and risk currencies down. This is scored however at +2 because the extreme values are likely to see fiscal and monetary stimulus from central authorities. In countries such as France and Italy there are signs of Government interactions to help businesses and also central banks like the Fed have agreed on monetary stimulus.
Taking a look at the weekly COT indicator we have at Logikfx we can see that hedge funds are buying the CHF which is a good sign for us if we want to short GBP CHF.
However, looking at the COT for GBP we can see that they’re also buying the GBP. The recent value has shown a sharp decline in open interest but ideally, we want hedge funds to be selling GBP if we want to short the currency pair. Therefore, currently the idea is to short GBPCHF but to add it to our watchlist and keep an eye on overall conditions. We may see a spike in GBPCHF which may give us an opportunity to short the pair in the future.
Looking at the price chart we can see recently the price has significantly dropped already. But as patient traders we’re looking at a few key levels to potentially get in a long term down trend. These are highlighted in red in the designated resistance zones. If we do see a potential retrace in price to these areas with confirmation of analysis including COT and Logic Strategy scores it could be a great continuation of the down trend especially if the global pandemic continues.
Therefore, in the next couple weeks we'll be keeping an eye out for any retraces to get in on a potential long term down trend movement. This may be supported with the COT positioning and re-analysis of the correlations such as Gold and the stocks which if you've completed our academy you'll know how to update!