Franc turns bullish on widened trade surplus in August

The market is still in the process of digesting the possibility of a Fed rate hike only at the end of the year. The decision to keep a check on the long-term rates by the BoJ has also changed the trend of several currency pairs either directly or indirectly.

These two developments in the past week have turned the spotlight on the Swiss Franc, which is also as a safe haven currency. While the US economy is sending out mixed signals, the Swiss economy seems to be emerging out of trouble, however, slowly. Considering the facts provided below, we are bearish on the USD/CHF pair.

In the US, the Markit Manufacturing Purchasing Managers’ Index reading, which measures the performance of the manufacturing sector, was reported on Friday. The reading fell to 51.4 in September, from 52 in August. The analysts were expecting a reading of 51.9. The reading, based on the survey of 600 companies, takes five individual indexes into account, namely, new orders, output, employment, suppliers’ delivery times and stock purchased.

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It can be noted that earlier this month, the US Census Bureau reported a decline in the housing starts. The US consumer sentiment for September, studied by the University of Michigan, remained flat at 89.8 on m-o-m basis.

The Swiss economy, on the other hand, registered a trade surplus of CHF 3.02 billion in August, up from CHF 2.86 billion a year earlier. While exports grew by 12% to CHF 16.05 billion, the imports jumped 13.5% to CHF 13.03 billion. Indeed, the market was expecting a surplus in August due to the fact that the country recorded GDP growth of 0.6% q-o-q in July 2016, the highest in the past 18 months and above the consensus estimate of 0.4% growth.

Even though Swiss economy is yet to come out of deflation, the situation has improved considerably. In August, the consumer prices declined 0.1%, compared to a 0.2% drop in the previous month. The deflation of 0.1% is far better considering the fact in the similar period last year, the Alpine economy posted deflation of 1.4%. Thus, fundamentally, the USD/CHF is expected to decline in the near future.

The USD/CHF pair is forming a descending triangle pattern. Based on the pattern, we expect the Greenback to decline against the Swiss Franc. The base line of the descending triangle, which acts as a temporary support, is at 0.9536. Even though it may take a while for the triangle to get broken, still, it is better to go short whenever the USD/CHF pair hits a resistance. One such opportunity exists now.

A Forex trader can go short in the USD/CHF pair at 0.9710 levels. To protect the account from losses due to unexpected price movements, a stop loss order can be placed above 0.9790. The short position can be closed at 0.9550.

As far as a binary trader is concerned, placing a bet on a one touch put option looks justifiable. The target level for the put option should be 0.9550 or higher, while the expiry date should fall in the third week of October.

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