Trade of the Week: USDCHF to see 55% more volatility?

<p><strong>By <a href="http://investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a> </strong></p>
<h4><span lang="EN-US" xml:lang="EN-US">Here are some Swiss Franc facts that may surprise you:<br />
</span></h4>
<ol>
<li>CHF is best-performing G10 currency vs. USD so far this year</li>
<li>SNB uses Swiss Franc to help achieve inflation target</li>
<li>Swiss Franc is a safe haven currency</li>
<li>USDCHF sees 55% larger-than-average moves on US CPI days so far in 2023</li>
<li>Blomberg FX model: USDCHF to trade within 0.8645 – 0.8865 this week</li>
</ol>
<p>&nbsp;</p>
<h2><strong>1) CHF is the best-performing G10 currency so far in 2023</strong></h2>
<p><span lang="EN-US" xml:lang="EN-US">USDCHF has a <strong>year-to-date decline of more than 5%</strong> at the time of writing (stronger CHF + weaker USD = lower USDCHF).</span></p>
<p><span lang="EN-US" xml:lang="EN-US">The Swiss Franc (CHF) has overtaken the British Pound for the current title, after battling it out for most of July, with the former also boasting of an <strong>advance against all of its G10 peers</strong> for the year-to-date period:</span></p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/WCRS%20YTD%20CHF%20vs%20G10.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="09b9d262-aaf0-468e-9541-85b6c6af550c" data-src="/s3-static/users/user16/WCRS%20YTD%20CHF%20vs%20G10.png" /></p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><strong>2) The Swiss National Bank (SNB) has been allowing CHF to strengthen </strong></h2>
<blockquote><p><em><span lang="EN-US" xml:lang="EN-US">This central bank uses the CHF exchange rate as a major tool for controlling inflation.</span></em></p></blockquote>
<p><span lang="EN-US" xml:lang="EN-US">A stronger CHF means cheaper imports, and also more receipts from its exports, hence Switzerland’s consistent trade surplus.</span></p>
<h5><em><span lang="EN-US" xml:lang="EN-US">Fun fact: Switzerland’s watch exports have grown by double-digits year-on-year (&gt;10%) in 4 out of the first six months of 2023. </span></em></h5>
<p><span lang="EN-US" xml:lang="EN-US">After over a decade of limiting the Swiss Franc’s strength, the <strong>SNB finally signalled in November 2022</strong> that it’s ready to sell foreign currencies and <strong>let the CHF strengthen</strong><em>.</em></span></p>
<p><span lang="EN-US" xml:lang="EN-US"><em>NOTE: The SNB exchanges foreign currencies back into Swiss Francs, which in turn drives up the value of the latter.</em></span></p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/USDCHFDaily%20-%20SNB.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="fa10068e-53d0-4b2a-b512-9b5c1e8a532e" data-src="/s3-static/users/user16/USDCHFDaily%20-%20SNB.png" /></p>
<h3><strong><span lang="EN-US" xml:lang="EN-US">Furthermore, the SNB has maintained its willingness to keep hiking rates.</span></strong></h3>
<p><span lang="EN-US" xml:lang="EN-US">Such hawkish rhetoric comes despite inflation already falling within the central bank’s 0% &#8211; 2% CPI target range (Switzerland’s July CPI = 1.6%).</span></p>
<p><span lang="EN-US" xml:lang="EN-US">However, the SNB appears concerned that inflation may make a comeback later this year, hence expectations for another rate hike.</span></p>
<blockquote>
<h4><em><span lang="EN-US" xml:lang="EN-US">At the time of writing, overnight index swaps are pointing to a <strong>60% chance that the SNB could hike by a further 25-basis points before 2023 ends.</strong></span></em></h4>
</blockquote>
<p><em><span lang="EN-US" xml:lang="EN-US">NOTE: SNB only makes a rate decision once every quarter. Its next rate decision is due on September 21st.</span></em></p>
<p><span lang="EN-US" xml:lang="EN-US">Recall that, a currency tends to strengthen as markets continue to expect interest rates in that country to climb higher.</span></p>
<blockquote>
<h4><em><span lang="EN-US" xml:lang="EN-US">Hence, such expectations have aided the Swiss Franc to reach its strongest level against the US dollar in about 8 years.</span></em></h4>
</blockquote>
<p><span lang="EN-US" xml:lang="EN-US">Back in mid-July 2023, USDCHF dipped below 0.8600 for the first time since the SNB lifted the Swiss Franc’s cap against the euro back in 2015 which saw CHF skyrocketing (and USDCHF plummeting).</span></p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/USDCHF.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="0e694b2e-d609-43c2-ba92-4971dee23c18" data-src="/s3-static/users/user16/USDCHF.png" /></p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><strong><span lang="EN-US" xml:lang="EN-US">3) Swiss Franc is a safe haven currency</span></strong></h2>
<blockquote><p><em><span lang="EN-US" xml:lang="EN-US">A <a href="https://www.forextime.com/market-analysis/what-are-safe-haven-assets-why-are-they-rising-russia-attacks-ukraine">safe haven</a> is an asset that investors buy up with hopes of preserving their wealth in times of heightened fear and great uncertainty.</span></em></p></blockquote>
<p><span lang="EN-US" xml:lang="EN-US">Consider how the <strong>Swiss Franc gained by 2.86% versus the US dollar for the month of March 2023</strong>, amid the banking turmoil in the United States as well as Switzerland.</span></p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/USDCHFDaily%20-%20safe%20haven.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="cdec23b4-0bc5-4a91-8905-6aae0e9b0364" data-src="/s3-static/users/user16/USDCHFDaily%20-%20safe%20haven.png" /></p>
<blockquote>
<h3><em><span lang="EN-US" xml:lang="EN-US">Currently, with markets fearing a recession, that has also helped drive up the value of the safe haven Swiss Franc.</span></em></h3>
</blockquote>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><strong><span lang="EN-US" xml:lang="EN-US">4) USDCHF sees 55% bigger one-day move on day of US inflation data release</span></strong></h2>
<p><span lang="EN-US" xml:lang="EN-US">So far in 2023, USDCHF tends to move by about <strong>56 pips</strong> (between its highest to its lowest intraday price) on average within a single trading day.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">However, that average intraday move soars up to<strong> 87 pips on the days that the US consumer price index (CPI) is released.</strong></span></p>
<blockquote>
<h4><em><span lang="EN-US" xml:lang="EN-US">That’s a 55% increase in volatility!</span></em></h4>
</blockquote>
<h3><span lang="EN-US" xml:lang="EN-US">Hence, brace for heightened volatility when the <strong>US CPI due is released this Thursday, August 10th!</strong> ​​</span></h3>
<p>&nbsp;</p>
<p><span lang="EN-US" xml:lang="EN-US">Currently, economists are forecasting the following numbers for the upcoming US CPI report:</span></p>
<ul>
<li><strong>CPI month-on-month</strong> (July 2023 vs. June 2023) =<strong> 0.2%</strong></li>
<li><strong>Core CPI</strong> (excluding more volatile food and energy prices) <strong>month-on-month = 0.2%</strong></li>
<li><strong>CPI year-on-year</strong> (July 2023 vs. July 2022) = <strong>3.3% </strong>(a slight uptick from June’s 3% year-on-year increase)</li>
<li><strong>Core CPI year-on-year = 4.8%</strong> (matching June’s core CPI y/y number of 4.8%)</li>
</ul>
<p>&nbsp;</p>
<h4><strong><span lang="EN-US" xml:lang="EN-US">Potential scenarios:</span></strong></h4>
<ul>
<li>A set of CPI numbers that show <strong>US inflation is moderating further</strong>, which in turn allows the Fed to back away from a September rate hike, may drag <strong>USDCHF lower</strong> on the weaker US follar.</li>
<li><strong>Higher-than-expected CPI readings,</strong> which stoke fears of a resurgence in inflation that forces the Fed into yet another rate hike next month, may translate into a stronger US dollar and a <strong>higher USDCHF.</strong></li>
</ul>
<p>&nbsp;</p>
<p><em><span lang="EN-US" xml:lang="EN-US">BONUS FACTS: </span></em></p>
<ul>
<li><em><span lang="EN-US" xml:lang="EN-US">At the lower-than-expected US CPI release on <strong>July 12th</strong>, USDCHF registered an intraday move of <strong>139 pips!</strong></span></em></li>
<li><em><span lang="EN-US" xml:lang="EN-US">That was its <strong>biggest one-day DROP in % terms so far in 2023</strong>, and also its 3rd largest single-day move (both up and down) in percentage terms of the year so far.</span></em></li>
</ul>
<h4><em><span lang="EN-US" xml:lang="EN-US">In other words, if recent history is to be a guide, brace for a volatile USDCHF on US CPI release day.</span></em></h4>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h2><strong><span lang="EN-US" xml:lang="EN-US">5) USDCHF likeliest to trade within 0.8645 – 0.8865 this week.</span></strong></h2>
<p><span lang="EN-US" xml:lang="EN-US">According to Bloomberg’s FX model, there’s a <strong>72% chance</strong> that USDCHF trades within the above-mentioned range over the next one-week period.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">Here are some further key levels of interest for the immediate term:</span></p>
<p>&nbsp;</p>
<p><strong><span lang="EN-US" xml:lang="EN-US">POTENTIAL SUPPORT:</span></strong></p>
<ul>
<li><strong>21-day simple moving average</strong></li>
<li><strong>0.864 – 0.866 region</strong> = lower bound of Bloomberg FX model forecast / area for choppy July price action</li>
<li><strong>0.8600</strong> = psychologically-important level</li>
</ul>
<p>&nbsp;</p>
<p><strong><span lang="EN-US" xml:lang="EN-US">POTENTIAL RESISTANCE:</span></strong></p>
<ul>
<li><strong>0.8800 </strong>= psychologically-important number</li>
<li><strong>0.8820 </strong>= early-May low</li>
<li><strong>0.886 region </strong>= upper limit of Bloomberg FX model forecast / 50-day simple moving average / upper bound of USDCHF downtrend since November 2022</li>
</ul>
<ul>
<li><strong>0.89014 </strong>= June 2023 low</li>
</ul>
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<p><img decoding="async" loading="lazy" class="size-full wp-image-54242 alignleft" src="https://www.investmacro.com/articles-analysis/wp-content/uploads/2014/07/Forex-Time-Logo.png" alt="Forex-Time-Logo" width="262" height="90" /><strong>Article by <span><a href="https://www.investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a></span></strong></p>
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