What’s up LITA traders, Matty here trying to push some more ideas out as there’s been a few data points that have started to show promising signals to inflation and deflation. I’ll be covering USDCHF fundamental analysis, sentiment analysis and a little bit of that price analysis of what I’m expecting in the future.
COVID19 continues to impact many lives across the globe which in turn directly affect the Forex market. There’s still a lot of uncertainty to when a vaccine will be developed and who will develop and distribute it, this slumps consumer and business confidence moving forwards and essentially creates that risk off environment I’ve talked about in the past.
One of the key fiscal rules that have been implemented across the world is that masks need to be worn in most public places. Governments in the US and UK dismissed the effectiveness of masks at the start of the pandemic and are now eating their own words. But one thing it does show is that they’re trying to minimise any spikes in infection rates as this could cause further lockdown restrictions and GDP contractions.
One thing for sure is that during these extreme scenarios we have monetary and fiscal action meaning the central bank and Governments intervene in the markets to prop up their economy. Watching out for when these happens is important. Lets take a look at the macro currency strength meter to see what may be a possible opportunity in the future.
Logikfx's Macro Currency Strength Meter
Over the last 2 months the U.S. has maintained a positive score after being stunted by the pandemic in quarter one it’s looking to slowly creep back up. On the flip side Switzerland saw negative economic conditions, it started to grow in July but moving into August started to get hit negatively again as 2nd wave of COVID19 creates further uncertainty.
The currency strength meter allows us then to identify USDCHF as a potential trading opportunity in the long side. The next steps now are to analyse them on a relative basis to see if our analysis agrees with the fundamentals from the strength meter.
Gross Domestic Product (GDP)
We’ve started to compare USDCHF against the GDP differentials to see what we can conclude and a very interesting point is the huge downwards spike. This is caused by the US contracting by 9.5% in Q2! Whereas Switzerland only contracted by -1.3%. Generally when we’re analysing the GDP differentials we’ll show contractions as a short bias and growth as a long bias. Therefore based on the most recent data we have a short bias on this current economic indicator. However, we need to work on future expectations so we’ve taken into account the IMF forecasts on future GDP to see what may happen and that’s a “V” shaped recovery in favour of the US by 1.1%. If we see this trough out it’ll be a huge sign for a potential reversal in the downtrend we’ve been seeing on USDCHF.
What we’ve included in the analysis this time round is the Exxon Mobile company. If you don’t know what they do they’re basically into their oil selling, typical American Oil company huh. Nonetheless, we need to consider major oil based companies due to the United States being the worlds largest oil exporter/ importer.
Throughout the analysis of over 30 years of data we found a correlation of -74% meaning a direct negative correlation. Makes sense due to commodities have an inverse relationship to the dollar. Most recently the data has shown major oil markets plummet and therefore companies like Exxon Mobil are directly affected, they’ve been directly falling in value since 2014, the biggest drop being this year. Due to the inverse relationship and the negative growth of Exon Mobil it gives us a potential sign of future strength of the USD.
If you look closely throughout 2014 to now USDCHF has been slowly rising, this could be a uptrend to get in on with our analysis.
Since we’ve analysed Exxon Mobil we might as well analyse the crude oil WTI, this too holds a negative correlation of -72% very similar signs to Exxon. Oil prices hit the news when prices hit 0 earlier this year, prices have recovered slightly for oil but the demand still continues to be stunted. Aviation (Planes) have been directly impacted by COVID19 which affects oil prices due to low demand for oil now, on top of this many people are working from home which means less cars are on the roads and less people spending money on petrol (gas).
What we may see in the future if oil prices continue to follow its downtrend is USDCHF continue it’s upwards trend moving throughout 2020. Last month oil prices gained by 1% which is a slight long bias but more of a neutral one in my opinion.
Therefore, in the analysis we really need to keep an eye on oil prices as if they drop it will be a great confidence indicator for our long trade on USDCHF. BUT! If oil prices see a rebound in prices, we may see USDCHF take a downwards swing so keep track of the oil data moving forwards. It’s very uncertain times which could see oil prices spike up and down.
Gold might have been a surprise in the analysis but Gold is a really important commodity to consider when analysing any CHF. Gold holds a majority in the export/ import business with the central bank of Switzerland holding many reserves in gold in the past. Gold is also a hedge against inflation but also a psychologically driven commodity which is that when things are going bad people generally start buying gold to protect their money.
This is why when we analysed USDCHF against Gold over the past 20 years we saw a 94% negative correlation! Which means when gold prices go up USDCHF goes down and vice versa. So when we were considering gold in the analysis and we say Gold at all times high we’re starting to question will it hold these highs or is it due for a downwards move soon. Since it’s only the start of the month gold prices have only increase by 0.35% since last months prices and it’s starting to stagnate a bit.
What we want to do as professional LITA forex traders is add this to watch on a weekly/ daily basis. Any bearish signs in gold will be great confirmations for our long idea on USDCHF! That’s two commodities on our watchlist oil and gold now to keep an eye on for the best probable outcome in the ideas.
Interest Rate Differential Analysis
The second to last fundamental indicator throughout the analysis on USDCHF is the interest rate differentials.. nearly done don’t worry. This one is a really interesting indicator because Switzerland are one of the only countries in the world to actually have negative interest rates, meaning you actually have to pay to keep money in the bank!
Currently interest rates have yet to change meaning it’s maintain a 1% differential in favour of USD. This is normally bullish for the USD in the future but what will make us even more confident is if interest rate differentials start to increase. For example, from 2012 the interest rate differentials started growing within a positive differential equating to an increase value on USDCHF, if this happens again in the future an uptrend reversal in USDCHF could be imminent!
Finally we’re considering the S&P500 a major stock index in the United States which is linked towards the relative wealth of Americans in comparison to those in Switzerland and the rest of the world. We’ve priced it in CHF to see what’s going on and what we’ve seen is that US pensions are becoming worth more relative to the rest of the world. This creates a long bias on this indicator as Americans start to hedge their wealth from inflation.
One thing we need to consider is that the Federal Reserve has been buying corporate bonds and propping up businesses which create an artificial environment in stocks making it difficult to foresee what may happen.
Now that we’ve gone over the fundamentals our next two steps are checking the market sentiment and price data. Let’s jump straight into those.
Commitment of Traders Analysis (Logikfx COTA Indicator)
One of the great signs of hedge fund sentiment is that they’re actually going from a net short open interest to a net long open interest. These generally have a much higher probability of being long term trends as hedge funds start to position themselves in the markets and adjusting to fundamental conditions. If they continue to add positions over time these generally turn into long term trends as seen in the past, so definitely keep an eye on COT for timing your position.
The CHF COT sentiment has seen a very similar situation which isn’t great for our long idea. It’s shown hedge funds hold a net long open interest for just over a year. It’s honestly been falling since May which is good but the best course of action would be for it to be in a negative range.
Therefore on a sentimental level we’re net neutral on our bias. If you’re a conservative trader, make sure to keep an eye every week on this sentiment to bring the odds in your favour. What we’re going to do now is check on price data as our final step.
USDCHF Price Analysis
On a weekly level we’re seeing price starting to reach previous support where buyers have started to push ahead. These are highlighted in green on the image above. Very recently when reaching this region buyers have started to come in but we’re still in the early phases.
What we’ll be doing is looking into the daily time frame to identify any possible confirmation signals to the upside
On the daily time frame we’re seeing some buyers come in recently but that’s not enough to get in on a trader. You really want to apply your traffic light system and know when to wait, stop and take the trade.
I’ve outlined some price behaviour for a potential reversal sign but applying any types of technical analysis here will do the trick on what you think is valuable reversal signs.
Overall, keep an eye on the idea it’s on my personal watch list and just keep track of the variables I’ve outlined. Looks like a promising one though!
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