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USDCHF Analysis (June, 2022) Highest Inflation in 40 Years

Consumers, like you and I across the world are facing rising prices... from your food to your fuel in your cars and energy at home. This rise in prices has a fancy word called "inflation" and the United States had one of the largest rates of inflation in the past 40 years!

Annual inflation rose to 8.6% in May - BBC

The reaction to these rising price levels is tackled by two different market players:

  1. Government

  2. Central Bank

The Government will start to cut back on spending to curb inflationary pressure, they may also start to re-impose specific business and consumer taxes which were scaled back during the pandemic. These pressures make consumers and business spend less as they face higher costs... an attempt to lower the levels of inflation through demand.

On the flip side we're seeing the central bank have two main levers:

  1. Increasing interest rates

  2. Decreasing money supply

The Central Bank has been increasing rates since March in attempt to curb inflation... the interest rate increase is an attempt to make lending expensive so people take on less debt and making mortgage payments/ other forms of credit cost more. All actions to stop you spending money so prices don't rise too quickly.

The economy is facing wide spread supply chain issues with the on-going pandemic in China which still affects thousands of people today. On top of this we're seeing restrictions coming from the war in Ukraine which affect many energy consumers in Europe...

All in all, this inflationary pressure is bearish for a currency...

Technology Summary

Overall the technology summary page is showing a bearish sentiment for USDCHF, on a fundamental level we're seeing the following economic indicators show bearish data:

  1. Macro currency strength meter

  2. GDP differentials

  3. Hedge Fund positions

One of the conflicting indicators would be interest rate differentials.

Three out of the four main indicators suggest we have more weight on the bearish side for USDCHF but we need to be mindful of the conflicting indicator and what this means...

Macro Currency Strength Meter

The macro currency strength meter overall has shown a clear bearish trend for USD over the past month. This can be seen with the inflationary pressure the United States has been put against...

However, the exchange rate has been rising in the recent weeks suggesting the monetary action of raising interest rates is working by making the dollar appreciate... counter acting the inflation.

What we're seeing on the flip side for CHF is bullish economic data releasing showing a recent bullish trend the past few weeks, if this trend continues we may be in for a potential bearish move after the correct.

GDP Differentials

The GDP Differentials is showing both USD and CHF growth rates falling year on year...

However, in this case we can see that the CHF and Switzerland will be growing at a slower rate than U.S meaning there's a positive differential between the two rates.

What we can distinguish from the differential is that they're heading downwards at a bearish rate.

Trade Analysis (Imports/Exports)

WTI is a price gauge of oil... and by no surprise we can see the price of oil has sky rocketed over the past year increasing over 100%.

During this same period we've seen the USD appreciate but at a much slower rate showing a positive correlation.

The recent dip in oil prices may soon reflect in the price of USD as it agrees with the overall fundamental direction.

Gold prices are another commodity we've chosen to analyse against USDCHF...

Gold is seen as a major safe haven commodity and in comparison USD isn't as safe.

That's why we can also see a potentially negative correlation between USDCHF and GOLD as CHF has major reserves held in Gold which could impact this relationship.

Gold prices have taken a hit over the past few months and again in the recent weeks... it will be interest to see whether this is a bearish correction and it continues to uptrend or whether Gold has had its run.

Apple is a company we have rarely included in the analysis but deserves some spotlight.

We can see overall the company has a negative correlation against the value of the USD... why?

Well, a high valued dollar actually makes buying Iphones and other Apple products very expensive for other countries which is one potential reason for this relationship... and what we've seen the past few months well is a very negative movement in Apple.

This saw USD rise in value and again in the most recent dip..

Overall, the trade analysis doesn't agree with the fundamental direction... which means I'd keep this one on the watch list and keep an eye on the analysis to see if there's any movement in direction.

Interest Rate Differentials

The interest rate differentials were on of the main contradictory indicators. Why?

The Federal Reserve in the United States has reacted to the inflationary pressures by increasing the interest rates in the United States the past few months...

We saw rates go from near zero to now 1% which is a significant jump... it will be interesting to see the impact of these changes and how far the FED will go to curb inflation.

Hedge Fund Positions

The hedge fund positions overall are showing bearish signs since around mid way where the hedge funds sold more USD than CHF...

We're coming now to a similar situation where hedge funds are selling USD more than CHF which is creating that negative differential in the interest rates.

Overall, this shows our idea is with market sentiment and not against the big money flow.

Price Analysis

The current exchange rate has seen huge bullish spikes throughout the pandemic and uncertainty.

Since the US dollar is a safe haven reserve currency, countries stock up on it in times of uncertainty as it's deemed safer.

In this case we're seeing the exchange rates rise since March where the central banks increased interest rates..

Now that prices are coming to a similar level where sellers came in during the past... will they take control?

Watch out for any technical bearish signs as we reach that previous peak point as this may fulfil a double top technical pattern creating a potential short term bearish movement or even a trend...

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