CHF Forecast Q4 2020: USD/CHF to Continue the Consolidation
Skerdian Meta • 7 min read
The Swiss Franc (CHF) is less volatile than most forex majors, despite occasional interventions from the Swiss National Bank (SNB). But, the volatility in [[USD/CHF]] has increased this year, following the global events. In February, we saw a decline of 8 cents, and then a reversal back up in March, but that move was mainly a result of the USD, which surged as a global reserve currency, as markets began to panic as a result of the coronavirus outbreak. The volatility has declined since then, but the bias for this pair has been bearish during this time, with the USD index (DXY) also declining, which means that the bearish move since late March has come from the USD again. Although, the [[USD/JPY]] has remained largely unchanged for several months, suggesting that the CHF, at least, hasn’t declined like the JPY, which followed the USD, as the world reopened and the risk sentiment improved. On the other hand, the CHF hasn’t been exactly surging like gold, which broke above $ 2,000 in August. The SNB has taken several measures to counteract the contracting economy, due to the COVID-19 lockdowns and the stronger Swiss Franc against the USD. But the situation might be changing for this pair now, as the technical indicators show in the technical analysis section below.
Current USD/CHF Price: $
Recent Changes in the USD/CHF Price
|Period||Change ($)||Change %|
|30 Days||-$ 0.004||-0.4%|
|6 Months||–$ 0.043||–4.7%|
|1 Year||–$ 0.067||-7.3%|
|5 Years||–$ 0.053||–5.8%|
|Since 2000||-$ 0.823||-46.6%|
As mentioned above, the USD/CHF has been on a bearish trend since late March, as the USD has declined on one hand, while the CHF was steady at worst, or slightly bullish, as a safe haven in these times of uncertainty, as we will see from the CHF index (SXY) below. But, the situation is changing, with the US economy recuperating well, while the European economies are slowing down, which will affect the Swiss economy negatively, which in turn means that the decline in the USD might be coming to an end, and the near-term trend in the [[USD/CHF]] will probably shift. The technical analysis also points to a bullish reversal soon. Although, this pair has been trading within the 15 cent range since 2010, which will probably stretch into this decade, as this pair reverses higher from the lower levels of the range, which stretch between 0.87 and 1.03. But, the world is changing fast now, and no one knows how this will end up and how the world will be rearranged, but if the future remains uncertain, both the USD and the CHF will remain in demand, which also points to further sideways price action on the larger time-frame charts.
|USD/CHF Forecast Q4 2020: 0.95-0.96||USD/CHF Forecast 1 Year: 0.63-0.65||USD/CHF Forecast 3 Years: 0.55-0.60|
|Price Drivers: COVID-19, Global Risk Sentiment, US Elections||Price Drivers: Post US Elections, Risk Sentiment, Global Economic Recovery,||Price Drivers: Eurozone Economy/Politics, USD Correlation, Global Economy|
The USD/CHF Price Prediction for the Next Five Years
The Swiss economy is very closely connected to the Eurozone economy, since Switzerland is a small nation surrounded by a large union and most of the business with the outside world is done with or through the EU. Therefore, the SNB would like to keep the CHF fixed to the Euro, since this eliminates a lot of headaches for businesses, due to price fluctuations in both currencies. They did try to keep the CHF pegged to the Euro at 1.20. But, the peg was removed in January 2005 and the USD/CHF lost around 20 cents in a few hours, with many brokers going bankrupt. However, the price turned back within the range, although there are a number of factors which might affect this pair heavily. We will take them into account in this USD/CHF forecast.
Will COVID-19 Push the Safe Haven Further for the CHF?
Safe havens have benefited from the coronavirus pandemic, which hurt the sentiment among the consumers, above all. The global economy took a big hit and we witnessed a flash recession during the lockdown months in March and April, sending risk sentiment lower and the demand for safe havens surging higher. As a result, the CHF has been climbing higher since March, after the roller-coaster ride in the previous weeks. The global economy started to rebound after the reopening, but the rebound has cooled off in most of the world, which is keeping consumer sentiment pretty low and the investor confidence still in negative territory. We don’t yet know when COVID-19 is going to be a thing of the past, as deaths and infections are falling, but they still continue, and the restrictions also continue in certain places, with threats of more restrictions or perhaps lockdowns, like in Victoria, Australia, which is and will be keeping the risk sentiment dampened, while the demand for safe havens is on. But, the entire situation with the coronavirus is dying out and will end at some point. The restrictions will get easier if there are any, since the people are already tired of them, which will mean that the sentiment resulting from COVID-19 will start to improve and the demand from safe havens will decline. We have already seen a bearish reversal in gold in the last few weeks, as it retreats below $ 2,000, while the past week ended up forming quite a bullish candlestick for the USD/JPY, which also points to a bullish reversal for this pair. So, I assume that apart from small hiccups, the sentiment resulting from the coronavirus will keep improving from here on, which will be negative for the CHF and positive for the USD/CHF.
The Relationship with the Euro
The relationship between the EU and Switzerland is very close, since Switzerland is a small country using its own currency, surrounded on all sides by Eurozone countries which use the Euro. This means that the EU is Switzerland’s main trading partner by far, while Switzerland is also a major trading partner for the EU, despite its size. Switzerland accounts for 7% of EU exports of goods and 6% of EU imports. Taking services and goods into account, Switzerland ends up with a $ 75 billion trade surplus from the EU, as of 2019, which means just above CHF 80 billion. If the CHF were to appreciate too much, Swiss exports would become too expensive and less attractive for the EU and the rest of the world. So, the Swiss National Bank keeps a watchful eye on the EUR/CHF and intervenes from time to time. They made a strong intervention in the middle of March, buying this pair just above 1.05, which shows that this is a threshold for them, and they are also threatening with more intervention if needed. So, the area above that level looks like a great place to buy, with the SNB on our back. However, you should never trust central banks 100%; the failure to keep the peg at 1.20 in this pair in 2015 sent the EUR/CHF crashing lower and many accounts were burnt, including many brokers. But, besides the profits and exports themselves, the Swiss National Bank is also worried by the disruption in normal life, since many people move in and out of Switzerland daily and a very volatile exchange rate with the Euro would damage both businesses and normal life. So, despite the CHF increasing as a safe haven, the SNB is on the side of the sellers. As the sentiment improves, the USD/CHF will also increase and the SNB will be very happy with that.
SXY – USD/CHF Correlation
Looking at both the monthly charts of the CHF index SXY and the USD index DXY and comparing them to the USD/CHF, we see that the SXY index is more closely correlated than the DXY, although it is upside-down, since the CHF is the second currency in this pair. The SXY index starts at 2007, but comparing it with the DXY, it seems almost identical, although inverted. The SXY was on a bullish trend during the 2000s and it surged higher in 2011, amid troubles in the Eurozone and the Grexit situation. The USD/CHF was bearish during that period, and it crashed lower in 2011, as the CHF surged as a safe haven.
Let’s see if the SXY will stretch this year’s bullish move further up
The pullback in the DXY seems complete now
Later that year, we saw a reversal down for the SXY, while the USD/CHF turned bullish. Since then, the price action in both charts has been mainly sideways, the SXY with a slight bearish bias and the USD/CHF with a slight bullish bias. However, that bias is no longer in play this year, and the price is reversing in both charts. In the US, the economic recovery is still going strong, and the pace of expansion is increasing across most sectors, unlike in Europe and most of the world, where the economic rebound has slowed. This has been positive for the USD in recent weeks, reversing the DXY from the 100 SMA (green) at 92, and sending it higher to 93 points. The USD/CHF is also starting to reverse higher, which means that the USD correlation to the USD/CHF is increasing. But, the SXY is much more closely correlated to the USD/CHF overall, therefore we should consult that index when trading the USD/CHF.
Technical Analysis – Will the Recent Surge End at the 50 SMA for the USD/CHF?
During the late 90s, the USD/CHF was moving higher, with the 50 SMA (yellow) providing support during pullbacks. But throughout the 2000s, the USD/CHF turned pretty bearish, declining from 1.83 to 0.71 by 2011. The USD was pretty bearish during that decade, while the CHF was bullish, which kept the pressure on for this pair. Moving averages turned into resistance, with the smaller MAs, such as the 20 SMA (gray) pushing the price lower when the pace was strong during 2003-2005, and the 50 and 100 SMAs turning into resistance when the trend slowed.
Let’s see if this pair will resume trading within this range or fall lower
That lasted until the middle of the previous decade, when buyers finally pushed the price above the moving averages. Over the past five years, the same MAs turned into support once again, providing buyers with good trading opportunities when the price pulled back to those MAs. But buyers have been unable to make new highs in this pair since 2015, and this year sent the price diving to below the MAs again. Although, judging by the price action of the past several weeks, as well as from a fundamental perspective, a reversal higher is expected in the coming months, as the US economy keeps the pace of the recovery strong, while Europe and consequently Switzerland are going through another phase of economic weakness. The DXY is also starting to bounce off the 100 SMA, after retracing lower, but this process seems complete now, so the near-term bias should be bullish for this pair.