USD/CHF 2014 outlook – who is winning as the safe haven currency?

December 30, 2013 in Chart Alert

USD/CHF is not stopping to prove the bearish sentiments. The race seems to be continuously on to prove which is the safe haven currency and which is “THE” safe haven currency. The last week’s move to 0.8799 was just a “touch and go back” move but there was a lot to read between the lines.

Between the lines

Well, what we mentioned about “reading between the lines” was not just an figurative expression. In USD/CHF’s case it has been literally the case. The pair has been moving between two definite lines for long. A lot of big moves spanning close to a thousand pips but practically without any real direction. This sideways price action had been contained for past over 2 years between the 38.2% and 61.8% retracement levels of the fall from 1.1731 of the week of May 31, 2010 to 0.7069 of August 9, 2011.

Before we go ahead, we wish to mention that this update is the second followup of the first alert “Is USD/CHF Heading For A Nosedive?“. The first followup of that post can be checked here. We may re-post some of the charts from the previous updates for the ready reference and convenience.

USD/CHF literally between the lines

USD/CHF weekly chart - The pair has been in the sideways range but has been trying to break out from the range

A closer look on the price action of USD/CHF for the past 3 weeks.Three weeks back the first sign came for a possible wake-up call. Or shall we say that a sign came for a deeper sleep. Whatever, we can play around with the words but the actions have been simple. Let’s put those in bullet points:

  1. Week of December 9: USD/CHF touched a low of 0.8840 (9 pips below the 0.8849 level)
  2. Week of December 16: After some recoverly, USD/CHF touched 0.8832.
  3. Week of 22: The pair touched 0.8799.

The attempts for breaking out from the long standing support are evident. And even if the tails are long i.e. the gaps between the lows and the open/close prices for these weeks were very wide (which indicate uncertainty for the further drop) but one thing is clear that the lows have been getting lower. At least we take it as continued bearish pressure and the indication that the pair may be heading for much deeper dives. Don’t you? But then, let’s have a look on the overall trends of USD/CHF.

USD/CHF in a long-term downtrend

USD/CHF historical chart of past 10 years - A long-term downtrend

The above 10-year historical chart of USD/CHF shows that the pair has been in a long-term downtrend. We also notice an approximate double-top chart pattern and the price action is breaking below the neckline, which is another technical indication for possible deeper declines.

Safe Haven Currencies – Who will be the winner?

The above historical chart clearly indicates that the Swiss franc has been continuously gaining weight over the U.S. dollar. The strength of the Swiss franc and hence the fall of USD/CHF does not seem to stop. By all means the franc seems to weigh over the dollar as a safe haven currency.

What about the fundamentals?

We will touch base with some of the indicators here as a brief comparison for the economical factors which have been driving forces behind the long-term downtrend favoring CHF’s strength over the USD.

Unemployment – United states versus Switzerland

United States historical unemployment status

United States unemployment (historical data) - Unemployment in the U.S.A. before and after Lehman shock

Switzerland historical unemployment status

Switzerland unemployment (historical data) - Unemployment in Switzerland before and after Lehman shock

The average unemployment in the U.S. during 1948 to 2013 has been 5.83% (Source: U.S. Bureau of Labor Statistics). Post Lehman Brothers collapse and the global economic turmoil the U.S. had seen a steep rise in the unemployment. The situation started improving from 2010 beginning and there has been a steady decline in the unemployment but its is evident that the current status is far worse than what it used to be before the Lehman shock. The unemployment in the U.S. was 7.30% during October 2013 and in November 2013 it again slightly improved to 7.0%. On the other hand the unemployment in the Switzerland as reported by the State Secretariat for Economic Affairs has been much less in comparison. The average unemployment from 1995 to 2013 has been 3.40% and the October 2013 figures were 3.10%. The other thing to be noted is that though Switzerland had also seen a steep rise in the unemployment after the global economic turmoil of 2008 but the current figures are not so much different that those were at that time. Switzerland balanced itself faster.

Annual GDP Growth – U.S.A. versus Switzerland

United States annual GDP growth (historical data)

United States - annual GDP growth historical data

Switzerland annual GDP growth (historical data)

Switzerland - annual GDP growth (historical data)

The 3rd quarter of 2013 saw 1.9% year to year GDP growth in the Switzerland and 2% in the United States. Overall the GDP growth in the U.S. has been more stable during the past 13 years but though Switzerland has seen some deeper bottoms than the U.S. during this time, the peaks have also been higher than those of the United States. Since 2006 Switzerland has seen some attempts to cross over 4% annual GDP growth but that has not been the case in the states.

Trade Balance – U.S.A. versus Switzerland

U.S. Trade balance historical data

Continuous trade deficit in the United States - Historical data

Switzerland Trade balance historical data

Switzerland - Balance of trade - continuous surplus - historical data

As we all know and as clear from the above charts that though since 2009 the trade balance situation in the U.S.A. has seen some improvement but the country has been in continuous trade deficit with imports of goods and services much higher than the export. Switzerland, on the other hand has been in trade surplus and though there has not been a steep increase but a gradual increase is also evident.

Current Account – U.S.A. versus Switzerland

Historical current account situation in the U.S.

United States Current Account - Historical data - continuous deficit

Historical current account situation of Switzerland

Switzerland - Current Account - Historical data - continuous surplus

As the current account of the nation is basically the difference between the income/savings and investments, the trade balance is a major part of it even though it factors the net income from abroad and the cash transfers. As America has seen some improvement in the trade balance situation the same has been the case for the current account. However, there has been a continuous current account deficit in the U.S.A. and a continuous current account surplus situation in Switzerland. The situation has been further improving after 2008.

The bottom line – Government debt to GDP ratio

U.S.A. – Debt to  GDP ratio

United States - Government Debt to total gross domestic product (GDP)  ratio

Switzerland Debt to GDP ratio

Switzerland - Government Debt to total gross domestic product (GDP) ratio.

Government Debt To Gross Domestic Product in the U.S.A, reported by the U.S. Bureau of Public Debt averaged 60.3% From 1940 until 2012. In 2012 the ratio was 101.60 of country’s total GDP. Switzerland, on the other hand, presents a much healthier situation. The historical data of the debt to GDP ratio shows an opposite picture than the United States. There has been a continuous reduction and the figure recorded in 2012 indicated a national debt of  just 35.3% of the gross domestic product.

USD/CHF 2014 outlook

The four things which are clear from what we mentioned above are:

  1. USD/CHF has been in a long-term downtrend.
  2. The economic fundamentals indicate Switzerland in a much better position to have it’s currency better placed as a safe-haven currency.
  3. On technical front the recent break of long standing supports indicate that further declines are highly probable.
  4. The approximate double-top chart pattern of the monthly chart also supports the above outlook.

Where next?

USD/CHF - outlook for the year 2015. The fall may extend to complete 50% retracement.

If the resistance holds at or below 0.9250 then the year 2014 should see further declines first towards 0.8611 to 0.8640 support zone, however there are all the indications that the declines may extend towards the 0.8568 support witnessed During October 2011 and then most likely 0.8520 to complete the 50% Fibonacci retracement of the gains from 0.7069.

Can USD/CHF break below 0.8500?

Well, considering the overall downtrend the possibilities of a break below 0.8500 are quite high. If the double-top chart pattern works as those are supposed to then the fall may extend to 0.8200 or below. However as mentioned above that the first level support from the longer-term perspective, is expected near 0.9250. Any failure of that support will start neutralizing this outlook but a better indication for a near-term bottoming will only come if the resistance at 0.9455 fails.

We remain bearish for USD/CHF.

Please share your thoughts and opinions in the comment box below. You may also like to check the USD/CHF outlook which is updated weekly.
Connect with the author on Google at: +Himanshu Jain

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