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USDCHF – Proprietary model sees further potential upside on the horizon

Updated -  May 16, 2014 12:05:00 PM By Chris Tevere, CMT



Earlier this week we noted how USDCHF “broke above a few other levels of technical significance: 0.8850 (long-term falling wedge resistance) and 0.8895 (daily Ichimoku Cloud top & 100-day sma)…should the double bottom’s point of reference around 0.8950 give way, then USDCHF could see a rather significant continuation higher over the ensuing weeks/months.” Remarkably, this level was tested and briefly broke on an intraday basis yesterday, but then corrected back towards the figure later in the NY session. Technically, this failure is where the daily 144 & 169 ema’s reside and RSI is still mired in the 60/65 zone, which are both potentially concerning for USDCHF bulls, though we still believe there are reasons to be optimistic.  

The scope of the retracement back lower yesterday afternoon is interesting because it was not affirmed by our proprietary model, which actually continued to advance over the past 24-hours. Our model, which takes into account USDCHF’s 3-month 25 delta risk reversal, the equity spread between the US S&P500 & Switzerland’s SMI (20) and the 2-year interest rate differential between the Unites States & Switzerland, produces an R2 of 0.7383 since the beginning of May 2013 and currently implies a “fair value” of 0.9102. Based on current levels this suggests USDCHF is undervalued by approximately 1.5 standard deviations, and this aligns well with our previously highlighted bullish technical backdrop on Tuesday.

Chart Source: Bloomberg, FOREX.com


USDCHF breaks above the 100-day sma & daily Ichimoku Cloud top
Updated May 13, 2014 4:45:00 PM

Last Thursday we highlighted how USDCHF ended up putting in a longer-term double bottom into the aforementioned 2014 lows at 0.8700…a break above the prior high around 0.8860 is needed before we can get truly constructive”. Sure enough, USDCHF did precisely that as it broke above the noted 0.8860 high within the next 24-hours and has continued to ascend ever since. Interestingly, it also broke above a few other levels of technical significance: 0.8850 (long-term falling wedge resistance) and 0.8895 (daily Ichimoku Cloud top & 100-day sma). Additionally, daily RSI broke also above its corresponding falling wedge resistance; thus confirming the pattern breakout, yet it is still within the previously noted 60/65 resistance zone. Should this as well as the double bottom’s point of reference around 0.8950 give way, then USDCHF could see a rather significant continuation higher over the ensuing weeks/months.

Chart Source: Forex Charts by eSignal

Additionally, with the potential to see a further recovery, we decided to put our proprietary model to the test.

USDCHF proprietary fair valuation model takes into account:

  • USDCHF’s 3-month 25 delta Risk Reversal
  • Equity spread between the US S&P500 & Switzerland’s SMI (20)
  • 2-year interest rate differential between the Unites States & Switzerland

This produces an R2 of 0.7383 since the beginning of May 2013 and implies a “fair value” of 0.8953 – Based on current levels this suggests USDCHF is slightly undervalued.

Chart Source: Bloomberg, FOREX.com


USDCHF formed a potential Double Bottom into the 2014 low
Updated May 8, 2014 12:15:00 PM

Last month we highlighted a USDCHF confluence of resistance zone between 0.8930-65, which saw the convergence of falling wedge resistance, 100-day sma, 50% retracement & the daily Ichimoku Cloud top and interestingly enough this zone was not only tested, but held, on the back of the US March Employment report. Additionally, this rejection was coincided by a daily RSI failure into the key 60/65 level, which suggested the prevailing downtrend was still intact, and a move back towards the 2014 low could be in order.

Sure enough, earlier today USDCHF tested the 2014 low around 0.8700/05 on the back of the ECB’s decision to leave rates at 0.25% – Since the SNB maintains a 1.20 floor in EURCHF, this tends to mean that if EURUSD rallies then USDCHF is likely to fall and vice versa (although this is not always the case), but then as we suspected ECB President Draghi pulled the rug out from underneath the Euro during his press conference which we highlighted on Twitter:

As a result, this saw EURUSD rapidly reverse back lower and USDCHF ended up putting in a longer-term double bottom into the aforementioned 2014 lows at 0.8700 – This double bottom was coincided by a daily RSI higher low/bullish divergence which suggests a further potential recovery. Keep in mind that the double bottom pattern’s height is roughly ~250 pips, thus it produces a measured move objective of ~0.9200, which would be above the 2014 high. That said, a break above the prior high around 0.8860 is needed before we can get truly constructive on USDCHF. Additionally, we would also like to see daily RSI break above the key 60/65 zone to signify a renewed uptrend in the pair. Conversely, should USDCHF break below the 2014 low it would negate this near-term bullish bias.

Chart Source: Forex Charts by eSignal


USDCHF approaches long-term falling wedge resistance
Updated Apr 3, 2014 5:45:00 PM

USDCHF has been trading in a Falling Wedge Pattern since the beginning of 2H 2013 and the entire wedge decline has formed in the face of weakening bearish momentum; as witnessed by daily RSI bullish divergences. The falling wedge pattern is characteristically a bullish reversal formation, as a result it leaves the door open to a potential massive market reversal over the ensuing days/weeks. Interestingly, USDCHF is approaching long-term falling wedge resistance ahead of tomorrow morning’s all-important US employment report at 8:30am ET…Market Consensus – NFP: +200K & Unemployment rate: 6.6% (see our NFP preview for more).

USDCHF sees a confluence of technical resistance between 0.8930/65:

•  Falling Wedge resistance
•  100-day sma
•  50% retracement
•  Daily Ichimoku Cloud top

Furthermore, daily RSI in nearing the key 60/65 level, which is typically where it may find resistance if it’s in a prolonged downtrend, however if this is broken it would signify a renewed uptrend in price. Should this occur, USDCHF’s next potential levels to watch are 0.9000 (psychological/option related), 0.9090 (200-day sma) and 0.9155 (2014 high).

Chart Source: Forex Charts by eSignal

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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