EURCHF revisited

It’s that time of the year when the strategy teams from the big investment banks put out their forecast and top trades for the year ahead. Forecasting movements for equities, foreign exchange and interest rates is a daunting task in normal times, however, more so then ever in 2019, given the baseline provided by 2018 is, financial markets have experienced their most volatile year since the financial crisis in 2008. The 30% fall in the oil price in recent weeks is just the latest high volatility event of 2018, and the list of potential speed bumps for 2019 remains extensive.

While there has been progress on Brexit in recent days with the EU endorsing the Brexit withdrawal agreement and in doing so setting the scene for another round of political jostling ahead of a vote in the U.K. parliament next month, the U.S. - China trade war appears no closer to a solution. This morning the Wall Street Journal reported that just 3 days before the G20 meeting in Buenos Aries, President Trump expects to raise the tariff levels on $200 billion of Chinese goods to 25%, calling it “highly unlikely” that he would accept Beijing’s request to hold off on the increase.

Despite this news, U.S. equities and the S&P500 futures have been able to hold onto most of their overnight gains supported by anecdotes of a robust level of retail sales from Black Friday and Cyber Monday. While it will take time before the full details of the consumer splurge becomes available, early reports suggest online retail sales increased by a whopping 24% year on year. This development is at odds with the general slowdown in the U.S. data in recent weeks and suggests the U.S. consumer is in good health heading into 2019.

The overnight rally in U.S. equities is in line with the strong seasonal patterns that occur each year between Thanksgiving and Christmas, which we have highlighted in recent reports and which appear to have prompted a bounce in the S&P500 from ahead of the key 2600/2590 support level. That said a daily close above 2700 is still required to negate immediate downside risks.

Another positive development overnight towards a possible removal of a 2019 headwind, is an easing in tension after high level talks between Italy and the EU over Italy’s 2019 budget deficit target. Reuters reported that Italy is prepared to reduce its 2019 budget deficit target from 2.4% of GDP to as low as 2.0%. Italian 10-year yields closed back towards 3.25% after trading near 3.75% last week.

This has again rekindled our interest in EURCHF as a 2.0% budget deficit target is likely to meet with the EU’s approval and this would set the scene for a possible bounce in EURCHF from attractive levels.

From a technical perspective, EURCHF appears to have completed a 5-wave rally at the April 2018 high of 1.2005. The subsequent pullback to the September 1.1184 low, displays corrective characteristics, supported by the 1.1184 low tagging the 61.8% Fibonacci retracement of the rally from 1.0676 to the high of 1.2005, hence we remain bullish EURCHF.

Looking elsewhere, after the recent retracement in Italian 10-year yields, EURCHF is now finding support from the bond market. If Italian bond yields can stabilize at lower levels, it should set the scene for a stronger EURCHF as viewed on the chart below.

As a result of this analysis, I have opened a long EURCHF trade today in half position size which I will build to full position size on the formation of a daily reversal candle. This means, I feel there is a possibility of a break below 1.1300 before the recovery begins. As a result, the stop loss will be placed at 1.1218 and the target for the long trade is a retest of 1.1500.

Source Tradingview. The figures stated are as of the 27th of November 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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