This USD/CHF Rebound is just Another Chance to Sell says Hantec's Perry

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- USD/CHF pivoted lower following dovish FOMC

- But recovers after Eurozone data sends yields lower

- Risk sentiment is worsening, could support the CHF

The USD/CHF rate rebounded from earlier losses during the latter half of this week, posing the question of whether a more sustained recovery this month's losses could be on the horizon, although at least one analyst says it won't be long before the exchange rate resumes its earlier decline. 

On Wednesday the USD/CHF rate arrived at the point where it had fallen for 8 days in a row, and was then walloped particularly hard by the latest Federal Reserve (Fed) interest rate guidance. That guidance suggested the U.S. central bank will not raise its interest rate this year, though markets had until January envisaged at least a couple of rate hikes for 2019.

The pair broke through some key levels during its sell-off, which took it all the way down to 0.9900, although it has since rebounded aftter hitting the 200-day moving average (MA) located in that area.

Given the rebound that played out on Thursday and Friday, some may be wondering whether it has legs to go further, or potentially even reverse the multi-month to reverse the downtrend that began in early March.

Matthew Perry, a market analyst at FX broker Hantec Markets, says this is unlikely to happen. The Dollar’s recovery is based on shifting bond yield differentials that reflect a brighter outlook for growth and inflation in the U.S. than that which prevails in Europe, but Perry says this is unlikely to be enough to drive a stronger recovery.

"The subtext suggests this mere relative recalibration in differentials is not going to be enough to drive the evolution of a concerted trend higher, and as markets start to settle back down, “the dollar is beginning to weaken again and the likelihood is that yesterday’s rebound is another chance to sell still,” Perry writes, in a recent note to clients.

U.S. yields slumped on Wednesday after the Fed said it won't hike rates this year, as markets began flirting with the idea that the central bank might soon begin to think about reducing interest rates. However, since then, a similar thing has happened to bond yields in Europe and elsewhere.

It is the rising or falling relative difference between national bond yields that drives capital from one currency to another in the foreign exchange market, as yield is the interest rate return that is actually earned by investors and they will always seek to maximise the returns they make.  

“Major yield differentials look key to the moves for the dollar right now. A sharp move lower on Treasury yields on Wednesday drove the initial reaction on the dollar. However, as Treasury yields stood still yesterday, this was followed by subsequent sharp moves lower on the yields of Bunds, Gilts, and JGBs, allowing the dollar some respite,” Perry says.

Another factor in the case of USD/CHF specifically, is that the Franc has been supported by a worsening global outlook because it is a safe-haven currency which rises when investors become risk averse, something which appears to be happening again now.

This further undermines the basis for USD/CHF to rebound more concertedly, because the Franc’s gains from risk aversion are happening for the very same reason - and offsetting - U.S. Dollar gains due to relative improvement versus the rest of the world.

From a purely technical point of view, the short-term downtrend since the March 7 highs remains intact and more likely to extend than not.

The only major impediment to further losses is the 200-day moving average located at 0.9922 but a clear break below this would provide the green-light for an extension down support from a long-term trendline at 0.9850. Such a break would be confirmed by a move below the March 20 lows at 0.9894

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