Dollar/Swiss

In mid-June, much of the news in the forex world revolved around the implications of the EU constitution no-votes on the Euro, whether the U.S. dollar would be able to sustain its first-half performance, and whether Japan’s recent strong economic numbers would continue to buoy the yen.

The fact that the U.S. dollar/Swiss franc rate (USD/CHF) had gained the most ground over the preceding three months of any major currency pair (up more than 800 pips, or 7 percent, as of June 29) managed to slip under the radar. Is there more room for the dollar to gain ground against the franc, or has the explosive part of the rally already completed?

“Swiss miss” (Currency Trader, May 2005) pointed out the strength in the dollar/Swiss rate was driven by somewhat unexpected dollar bullishness early in the year against a backdrop of persistent Swiss economic malaise.

Even then, however, some analysts were predicting a temporary decline in the dollar/Swiss. As of late June, it hadn’t happened. The currency pair has essentially marched upward without interruption since April 21, and virtually every off-the-shelf momentum indicator (stochastics, RSI, et al.) has been signaling the market as “overbought” since mid May — a testament to the strength of the uptrend as ell as the inefficacy of such tools.

The issue now is whether an inevitable (not to be confused with “imminent”) decline in the dollar/Swiss will be a temporary pause in a longer-term up move, or an actual trend reversal.

In December 2004 USD/CHF just missed matching its 1995 low of 1.1172 before embarking on the first leg of its current uptrend, a development that no doubt caught the attention of chart watchers who were wondering if the market would successfully test this level.

It shows the currency pair at another notable technical level — the resistance implied by the August and September 2004 highs around 1.2850. Given the dramatic run-up in spring 2005, this level would be a likely technical candidate to at least temporarily turn back the market, as many chart oriented traders would be compelled to take profits on existing long positions while others would look to go short. Similarly, a breakout above this level would trigger a flurry of technical buying.

It also shows something else: trade signals from a representative breakout system that triggered a long position (based on surpassing the 24 week high) the week of May 20. This trigger level was determined by calculating the average and median number of weeks for the 20 look-back periods with the highest net profit over the past 30 years. The range was 12 weeks to 36 weeks, the average 24.9 weeks, and the median was 24 weeks, so 24 was selected as a representative value. The point is many trend-following approaches are likely long this currency pair. The June 24 high of 1.2841 missed the Aug. 6, 2004 high by 16 points (pips); a solid move above 1.2857 — which coincides with the fact that the aforementioned resistance level will trigger more buying from technical systems going long on a move above the 52 week high. (As of mid-morning on June 29, the USD/CHF rate had rallied to 1.2858.)