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EURCHF Long Trade Idea (Feb, 2021)

Updated: Mar 28, 2021

The euro area has had an interesting start to 2021. The latest GDP figures show the big four European economies beat expectations in terms of growth. The main areas include Germany growing in the 4th quarter followed by Spain but France taking a slight dip in growth but still beating expected losses.

Overall, the data is suggesting the businesses in the euro area have found a way to "cope with restrictions". The ECB also has further mentioned that they will support where needed but there's no need to cut interest rates further.

High Level Overview - Long EUR/CHF

Overall, you can see in the traffic like (RAG: red, amber and green) scoring system we have an overall bias that the key indicators are agreeing with a long bias. The consensus is showing that everything but GDP growth rates and the CHF hedge fund positions are pretty much ready for a potential upside move coming into Feb 2021!

The starting point of the whole analysis stemming from the award winning Macro Currency Strength meter which we'll jump into below.

Macro Currency Strength Meter - Logikfx

We always start off the fundamental analysis right using the Macro Currency Strength Meter to work out the economics behind individual economies. In this case we're comparing Europe (Euro) against Switzerland (CHF).

What we've found is that towards the end of 2020 CHF was maintaining strength. However, very recently in the past few days we've seen it drop...significantly. It's now in a negative macro score which means.. we're bearish on CHF.

On the flip side, the Euro was seen to hold a strong score. Dip to a neutral area then again rise this week.

Overall... this creates a bias to long Euro due to the strong score and short CHF due to the weak score.

GDP Differential Meter - Logikfx Technology

The GDP differentials are in an interesting spot. What's good is that the difference is currently in a positive region in favour of the Euro. Sitting at a 1% difference in growth rates, this is fairly bullish but the fact that it's fallen by 0.1% last year suggests that potentially CHF could grow faster than Europe. This means we'll need to keep an eye on this moving into the Q1 of 2021.

This was one of the two indicators not agreeing with the idea.

Import/ Export Analysis

Throughout the import and export analysis we analysed three key companies/ commodities. This consisted of Volkswagen, Gold and ROG.

Above we can see the price of VW against the EURCHF exchange rate. Most the time we can see that as price of VW goes up EURCHF goes down and vice versa. This is known as an inverse relationship. To put it in detail, when doing a correlation analysis it's got a negative correlation of -50%. So...50% of the time VW goes up, EURCHF goes down.

On the left here we have a quick profile of what VW do as a company and why they're so useful to analyse.

Europe are huge exporters of vehicles and VW sits in the motor vehicle industry.

If you're looking to trade Forex make sure to also read around the subject regarding stocks.

This will really help your understand when it comes to forex trading too.

The next step of the analysis is to see what Gold is suggesting.

Gold is a huge commodity in which Switzerland export/ import. Therefore, there's no surprise we have a -82% correlation with Gold against EURCHF.

Similar to the above, this time round as gold prices drop 82% of the time EURCHF rises. Since our idea is to long EURCHF, we can see this dip in gold in the top right when hitting the peak of 2000 might be our trigger to a potential upside move. Overall, gold agrees with the long... it's bullish for EURCHF.

Roche Holding is a company which you don't see often in the analysis. However, with the rise of the COVID-19 pandemic. It makes sense to include not only a Swiss company but a pharma company too.

The company profile on the right shows that ROG is a pharmaceutical focusing in oncology, immunology and infectious diseases. This is a crucial times for Pharma companies like ROG as they fight for market share to roll out the COVID-19 pandemic.

Below, we have ROG vs EURCHF and interestingly enough we have another inverse relationship. When ROG prices go down, EURCHF goes up. The best time we can see this relationship in action is between 2015 and 2018, ROG dropped from 300 down to 200 nearly which saw EURCHF rise from 1.05 to 1.2. The opposite happened between 2018-2020.

The most recent data shows ROG prices falling meaning... a potential upside on EURCHF!

Interest Rate Differential Indicator

The interest rate differentials are one of the core drivers of exchange rates... or at least they were when the interest rate environment was much stronger. Before, traders could make money on the carry trade alone. Now the interest rates are much lower, and even negative as we can see for the CHF.

The EUR interest rate vs CHF interest rate shows a positive differential of 0.75% this is bullish for EURCHF as the higher interest rates indicate a potentially higher currency value in favour of the Euro.

Domestic Stock Market Performance

The Euro Stoxx 600 is similar to the S&P500 but for European companies. It's a index which tracks the performance of the market and is generally a useful indicator for European wealth. What we've seen is that this initially during the start of 2020 there was a big dip due to COVID-19. Now, however with help from the ECB stimulus but also businesses adapting to the pandemic we've seen the index rise, now nearly reaching pre-covid levels.

The interesting thing with the Stoxx 600 however is that it's inversely correlated to EURCHF. This means what we're going to do is assess it as we have been doing in this post. The Euro Stoxx 600 prices have recently hit a slight resistance, dipping slightly. If this downwards movement continues we may see the STOXX600 fall further but also EURCHF make an upside move.

Open Interest Analysis - COT reports

Overall, it's quite easy it seems that hedge funds are longing the EURO but also the CHF. This market sentiment cancels each other out and we have no overall bias of market direction from the big money.

It will be crucial here to keep an eye to see if CHF positions fall (pink line goes down) and Euro hedge fund positions stay above zero. This will be great early signs of a EURCHF long with confirmation of market sentiment.

Technical Analysis

The technicals are the final step in the analysis... feel free at this point to use whatever technical analysis you think is useful to timing entries and identifying potential uptrend signals.

Here I've quickly identified that EURCHF is up trending for the past 6 months, we'll be wanting to get in on this trend and expect it to go further. I've also outlined a dotted line where resistance levels come into play. Retail traders at this point will likely start to pile into short positions.

I personally don't think these sell positions will hold. Markets seem to be very volatile right now and the tight intraday/ daily stops that are being set at these levels may not be equipped for the market volatility.

Overall... long bias looks great, do whatever analysis you want on top of this. Comment below or in our forum what you think of the idea and if it's on your watchlist. - Matty, Logikfx

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