Top Trading Idea Q2 2024: Long USD/CHF

Central banks have had their say for Q1 and there were arguably two surprises, both from central banks that have deployed negative interest rates in the recent past. The Bank of Japan decided to exit negative rates and the Swiss National Bank (SNB), in a surprise decision, voted to cut their benchmark interest rate – the first of the major central banks to do so.

Lower inflation forecasts for Switzerland and meagre growth lay the foundation for further easing to come from the often-unpredictable SNB before Chairman Thomas Jordan steps down in September. In contrast, The Fed requires more confidence that recent hotter-than-expected inflation is headed towards the 2% target on a consistent basis while growth and the labour market remain resilient – supporting the dollar.

Discover DailyFX's top 3 trades for the second quarter below:

Contrasting Fundamentals Present an Opportunity for USD/CHF in Q2

Now that the SNB has pulled the trigger and cut rates, this allows other central banks to consider the doing the same. However, being the first mover, the Swiss Franc opened itself up to currency depreciation due to a worsening of interest rate differentials. For other nations still experiencing stubborn inflation, this would have been a concern but given the franc’s undesirable appreciation and Switzerland’s impressively low CPI (1.2% in February) – the decision to cut actually makes sense for the EU member state.

Chart 1: Swiss GDP and Inflation Trend Lower

Source: Refinitiv Datastream, Federal Reserve Bank

A strong franc renders Swiss exports relatively less competitive compared with goods from countries with a weaker exchange rate. In addition, with inflation so low, Switzerland is able to absorb any imported inflation that may accrue as a result of the rate cut – but this is unlikely to be significant given its just a single 25 basis point cut for now.

Central Bank Policy Could Extend Bullish USD/CHF 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.

Implied Rate Cuts and Probabilities

Source: Refinitiv

In addition, the Fed only just maintained their projection of three rate cuts to come in 2024. The Fed’s dot plot takes into account the median value of the 19 estimates, meaning that the 10th dot represents the median. The chart below shows that had one more dot been placed between 4.75% and 5%, the result would have confirmed the likelihood of the Fed removing a cut this year – which would likely have seen the dollar rise in the moments after the meeting. The near miss suggests that members at the Fed have lingering reservations about easing financial conditions given robust US data. If the strong data persist, markets may continue to support the dollar in Q2.

Chart 2: Fed Dot Plot March 2024

Source: Refinitiv Datastream, Federal Reserve Bank

The Trade: Long USD/CHF 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.

Weekly USD/CHF Chart

Source: Tradingview, Prepared by Richard Snow

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