USDCHF in 2023 with a rather erratic downtrend

In Q1, two central banks that have previously used negative interest rates made surprising decisions. The Bank of Japan exited negative rates, while the Swiss National Bank (SNB) unexpectedly cut their benchmark interest rate. The SNB may continue to ease further due to low inflation forecasts and weak growth. In contrast, the Fed wants more confidence in consistent inflation towards the 2% target before taking action.

CONTRASTING FUNDAMENTALS PRESENT AN OPPORTUNITY FOR USDCHF IN Q2
The SNB's rate cut may prompt other central banks to do the same. While the Swiss Franc may face currency depreciation, Switzerland's low inflation justifies the decision to cut rates.


The strong franc makes Swiss exports less competitive than goods from countries with a weaker exchange rate. Switzerland can handle any imported inflation resulting from the rate cut due to low inflation levels, but it is unlikely to be significant given the small 25 basis point cut.

CENTRAL BANK POLICY COULD EXTEND BULLISH USDCHF SETUPS IN Q2

Market expectations foresee a strong chance (78%) of another 25-bps rate cut from the SNB in June and if the likelihood of that second cut gains momentum, perhaps on softer inflation or weaker GDP, the franc may depreciate further as markets price in such an outcome.

The Fed maintained their projection of three rate cuts for 2024. The Fed's dot plot, based on the median value of 19 estimates, suggests hesitation in easing financial conditions due to strong US data. If the data remains strong, the dollar may be supported in Q2.

THE TRADE: LONG USDCHF UPON IMPROVED ENTRY POINT
USD/CHF spent most of 2023 trending lower in a rather choppy fashion, but at the turn of the new year fortunes reversed. The pair traded higher and eventually broke above trendline resistance on the back of the surprise cut by the SNB. The guidance to this trade suggests looking to enter the developing uptrend at a better level due to the sharp ascent at the end of Q1. Another sign to wait for a better entry level appears via the rejection of higher prices at the 38.2% Fibonacci retracement of the 2023 decline. A move back down to 0.8829 would reveal a retest of trendline support (prior resistance), whereafter, a bullish continuation may provide a higher probability trade.

A level to consider includes 0.9085 which serves as a tripwire for continued bullish price action. Thereafter, upside targets comprise of 0.9245 and 0.9473. A retest of the late 2023 low would invalidate the bullish setup.