Now let’s look at what some quantitative analysis says about the actual price behavior. Statistical analysis on the daily and weekly time frames indicates the market is in a relatively unique situation. As of June 29, the dollar/Swiss had posted nine weeks of consecutive higher weekly highs and lows something it has done only three times before, and then only in string of three consecutive weeks from Feb. 7 to Feb. 21, 1997. The market moved sideways to lower after the third week in this series.
Considering consecutive higher highs only painted a more bearish picture based on 16 prior instances. Six weeks after concluding nine weeks of consecutive higher highs, USD/CHF was down more than 2 percent 68.7 percent of the time — despite the fact that five of these occurrences were consecutive weeks of gains from Feb. 8, 1985 to March 8, 1985 (which means the longest streak of consecutive weeks of higher highs is 13).
Another model of the current market condition produced similar results. The USD/CHF on June 24 made the highest high in 26 weeks and gained more than .1000 over the previous 26 weeks; the low 25 weeks ago was the lowest low in 26 weeks. Eight other instances of this pattern produced mixed results over the following twelve weeks, with more gains than losses at most of the weekly intervals, but several large losses skewed the results lower.
These statistics are not overly exciting (and unfortunately they are based on relatively small sample sizes), but they support a bearish perspective over the next several weeks with the caveat that conspicuous cases in the past (1985 and 1997, for example) underscore the market’s potential to continue rallying ferociously.
The rally from April 22 to June 29 spanned 10 weeks and 1,100 pips (.1100 points). It shows the performance of the USD/CHF pair following previous rallies of 1,100 pips over 10 weeks. This time, there were 87 prior instances, and after mixed results the first few weeks, on average, the bias was to the downside.
On the fundamental side, there is little on the near-term horizon that argues for a change in a bearish outlook for the Swiss franc — Switzerland’s export-driven economy is unlikely to rebound overnight. The outlook for the U.S. buck is what will continue to drive the pair.
A final note: As it posted a strong first half of 2005 after pundits had warned it was on its deathbed at the end of 2004, it’s reasonable to wonder if the greenback isn’t ready for some kind of correction now that almost everyone has turned dollar bull. However, that doesn’t mean the relative values of the dollar and the Swiss franc are poised to invert.
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