USD CHF Why parity may prove to be a near term top

US traders are off to the races once again, and just like every other day this week, there’s a risk-on tone to early trade. Today’s bullish catalyst for risk-on data was some good old-fashioned solid economic data.

The US Department of Labor’s weekly initial jobless claims report showed only 262k new unemployment claimants, the lowest reading of the year and nearly 25k below the reading of just two weeks ago. The uptick in jobless claims, one of the economy’s most timely (if noisy) indicators, at the start of the year had some analysts concerned, but with the measure falling back to the historical low levels that prevailed throughout much of the second half of last year, traders have once again adopted a cheery mindset. The simultaneous release of the Philadelphia Fed Manufacturing Index, which met expectations at -2.8, did little to dampen sentiment.

One of this week’s biggest themes has been the gradual unwind of last week’s excessive moves across global markets, and USD/CHF remains one of the best candidates for reversion. From late January’s high near 1.0200, USD/CHF collapsed nearly 600 pips to the mid-.9600s last week. While the pair did slice through its previous bullish trend line last week, the unit has rallied all the way back to test the underside of the broken trend line once as of writing.

In these reports, we often mention the “polarity principle” of technical analysis, or the tendency for previous support levels to become future resistance levels and vice versa, and this principle applies for both horizontal levels and trend lines. In other words, the broken uptrend line will now provide a potential resistance level for USD/CHF moving forward. Coincidentally, this resistance zone comes in right around parity (1.00), a key psychological level that may be a significant barrier of its own accord.

As another consideration, EUR/USD is approaching its own significant polarity principle level at 1.1050 (see Monday’s report for more). The euro and Swiss franc tend to be very closely correlated (their 20-day correlation coefficient is .96 and the 100-day coefficient is .91), so a reversal in the more heavily-traded euro could spill over to drive the franc higher as well. Finally, despite the recent bounce, both the MACD and RSI indicators on USD/CHF remain in bearish territory.

At this point, the preponderance of the technical evidence favors a reversal back to the downside off 1.00 resistance in USD/CHF, but that outlook could shift if bulls are able to push rates above parity (and correspondingly, EUR/USD falls below 1.1050).