USD/CHF Outlook: Reversal strength builds as payrolls take centre stage

• USD/CHF continues to give clean, reliable signals
• Bullish rebound accelerates following 50DMA break
• Price action shows no strong link to rates or risk appetite
• Delayed payrolls report next key focal point

Summary

Out of the entire FX universe, few pairs can lay claim to delivering cleaner and more reliable price signals than USD/CHF, or so it seems. We saw another example last week, culminating in what’s proven to be a rapid rebound, putting the October highs in range. Given its historic relationship with rate differentials and risk aversion, curiously, the latest leg higher doesn’t appear to have been driven by either, hinting traders may want to put extra weight on price action when considering potential setups.

Rates, Risk Appetite Link Weakens

Source: TradingView

For a pair regarded as being heavily influenced by rate differentials and risk aversion, USD/CHF has not shown any meaningful link with either other than 10-year yield differentials between the United States and Switzerland over the past fortnight, and even that hasn’t been overly strong with a correlation coefficient of 0.7 between the two.

For short-dated yield differentials, Fed rate cut pricing or expected volatility in the U.S. stock market, there’s been no obvious linkage over the same period. Even longer-term relationships have been weakening recently, as seen in the right-hand pane tracking the USD/CHF correlation with the same markets over the past quarter.

The weakening rates and risk relationship may reflect the trade deal struck between the U.S. and Switzerland late last week, especially as it contained requirements for Swiss investment into the U.S. within the details. That may explain the strengthening in the U.S. dollar, although it’s questionable whether capital would flow so quickly in response.

USD/CHF Eyes October Highs

Source: TradingView

Whatever the true reason, we’ve seen a decent leg higher for USD/CHF over the past week, beginning with an obvious hammer candle from a known support level on Friday. The bullish reversal signal proved accurate for what’s been seen since, with the price climbing above the 50-day moving average, .8000, .8037 and downtrend resistance running from early June.

The break above the 50DMA saw an acceleration of the move, with the pair trading up to .8071 resistance before stalling, making it the first topside level of note for anyone considering setups in the pair. If the bullish run extends beyond .8071, the October swing high of .8124 and .8150 resistance should be on the radar. As for downside levels, .8037, the June downtrend found around .8015 today and .8000 are the ones to watch before the 50DMA.

The message from RSI (14) and MACD is one of building upside strength, with the former now sitting above the neutral 50 level while the latter has just staged a bullish crossover in positive territory, confirming the signal. That favours bullish setups near-term.

Key Risk Events

With Nvidia’s Q3 earnings report out of the way, the delayed U.S. nonfarm payrolls report for September becomes the next key risk event for traders to navigate. An increase of 50,000 is forecast following a 22,000 increase in August. While dated and not accompanied by unemployment data, providing an incomplete picture of labour market conditions, the payrolls report has taken on extra significance over the past 24 hours given we’ve seen a significant hawkish shift in market pricing for a rate cut from the Fed in December, seeing the implied probability decline to around 25%. That puts emphasis on the data to deliver something reasonable, otherwise it may rekindle rate cut hopes and likely weigh on the U.S. dollar.

For the same reason, any attempt from FOMC members to fade the hawkish move may be influential, so speeches from Williams, Cook, Goolsbee, Hammack, Bar, Jefferson and Logan over the remainder of the week should be on the radar. Martin Schlegel, SNB President, is also scheduled to speak Friday, so that too comes with risk.