USD/CHF: Why Parity May Prove To Be A Near-Term Top

Matt Weller

One of this week’s biggest themes has been the gradual unwind of last week’s excessive moves across global markets, and USD/CHF remains one of the best candidates for reversion. From late January’s high near 1.0200, USD/CHF collapsed nearly 600 pips to the mid-.9600s last week. While the pair did slice through its previous bullish trend line last week, the unit has rallied all the way back to test the underside of the broken trend line once as of writing.

In these reports, we often mention the “polarity principle” of technical analysis, or the tendency for previous support levels to become future resistance levels and vice versa, and this principle applies for both horizontal levels and trend lines. In other words, the broken uptrend line will now provide a potential resistance level for USD/CHF moving forward. Coincidentally, this resistance zone comes in right around parity (1.00), a key psychological level that may be a significant barrier of its own accord.

As another consideration, EUR/USD is approaching its own significant polarity principle level at 1.1050 (see Monday’s report for more). The euro and Swiss franc tend to be very closely correlated (their 20-day correlation coefficient is .96 and the 100-day coefficient is .91), so a reversal in the more heavily-traded euro could spill over to drive the franc higher as well. Finally, despite the recent bounce, both the MACD and RSI indicators on USD/CHF remain in bearish territory.

At this point, the preponderance of the technical evidence favors a reversal back to the downside off 1.00 resistance in USD/CHF, but that outlook could shift if bulls are able to push rates above parity (and correspondingly, EUR/USD falls below 1.1050).

USDCHF Daily Chart

USDCHF Daily Chart