USD/CHF analysis: Does this head and shoulders have legs?

The US dollar has been on a strong rally in recent weeks, which has helped USD/CHF achieve a 7% rise from its September low. This surely pleases the SNB, who desire a weaker Swiss franc and were rumoured to have been intervening whenever USD/CHF dipped below 0.84.

Futures traders have also been supportive of the trend, with large speculators increasing net-short exposure to the Swiss franc, while asset managers (who have been great at calling USD direction) remain net-long USD index futures. In fact, futures traders remain near their most bullish on the USD index in aggregate in nearly six months. All in all, this points towards a limited pullback for USD/CHF.

However, December is usually associated with losses for the US dollar, and the Swiss franc tends to outperform its FX peers alongside the euro in December. And this it at odds of current market positioning. The question now is whether seasonality will kick in to drag USD/CHF lower, or fundamentals and current market positioning will overshadow

USD/CHF seasonality for December:

You can read the article above for a broader look at how the USD tends to perform during December, but the basic takeaway was that price action was choppy heading into Christmas and notably bearish between Christmas and new year.

Yet that doesn’t seem to be the case on USD/CHF, which shows a stronger tendency to trade lower throughout the month of December. There is also a more pronounced relationship between negative average returns and down days throughout the month, which suggests seasonality might stand a greater chance of success on USD/CHF, than say the USD index futures contract.

USD/CHF has an average return of -1.36% in December
This has generally made the Swiss franc the strongest FX major in December
During December, 70% of the tradable days have posted negative returns
And 64% of them have closed lower
Unlike the US dollar index, the bearish bias is more consistent throughout the month in December alongside the negative win rate

USD/CHF technical analysis

The daily chart shows a strong rally from 0.8400 to 0.8950, but a countertrend move is clearly underway. A head and shoulders top has also formed, which projects a downside target of 0.8652. However, I am questioning whether USD/CHF can reach that target unless fundamentals supporting the rally and market positioning changes.

Furthermore, USD/CHF is also heading towards a series of moving averages such as the 200-day EMA (0.8764), 100-day EMA (0.8723) and 50-day EMA (0.8742) which could make it a bit trick for bears along the way. Also factor in the potential for a strong NFP figure today, we could see a bounce higher before losses resume.

Ultimately, I suspect bears could be frustrated over the near-term and prices hold above the EMAs. There is also a risk that the H&S top becomes invalidated, before its next leg lower kicks in towards the end of the year. This could see gains capped and losses limited, before prices head towards 0.8700. At which point I think the USD rally could regain traction as we head into January, a month usually associated with a strong dollar performance.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.