At 9:30 pm Eastern Time tonight, the Reserve Bank of Australia (RBA) will be publishing their latest round of monetary policy meeting minutes. While there is a chance that their intentions could come across as more hawkish than expected, they currently have little reason to be. Despite relatively low unemployment at 3.5%, steady GDP growth, and annual inflation having increased by a full percentage point to 6.1%, the Australian economy has not overheated in a manner comparable to that of other countries.
Because their inflation threat is not nearly as dire as that faced by the US, the UK, and the EU, the RBA’s 50 bp rate hikes understandably pale in comparison to the Fed and the European Central Bank’s 75 bp hikes, or the Bank of Canada’s willingness to utilize a full 100 bp hike. Because of this disparity in economic circumstances, there is a good chance that the RBA’s meeting minutes will favor AUD bears tonight as a fundamental catalyst. For those who are interested in watching this unfold or perhaps taking a position, here are 2 paths for Aussie bears, along with their respective EdgeFinder ratings and categories.
1) AUD/USD (Receives a -4, or ‘Sell’ Signal)
With big monetary policy decisions and economic projections coming on Wednesday from a hawkish Federal Reserve, there is a chance that significant bearish momentum could be coming. Institutional traders clearly have far more confidence in USD over AUD, as per COT data.
2) AUD/CHF (Receives a -4, or ‘Sell’ Signal)
The Swiss National Bank is expected to implement a 75 bp rate hike on Thursday, officially leaving negative interest rates behind. This marks a hawkish pivot that continues to set apart the Swiss Franc as a safe haven currency.
Bonus: AUD/CAD (Receives a -2, or ‘Neutral’ Signal)
Though perhaps less clear than with the two aforementioned pairs, the Bank of Canada’s approach to contending with inflation contrasts remarkably with the RBA’s, despite both CAD and AUD being commodity currencies. Also, Canada has a monthly round of CPI data due on Tuesday.
As the trading week comes to a close, and forex traders are given another weekend of respite to mentally rest and/or backtest, it is worth considering where to pick back up on Monday. While there are many criteria to consider when selecting pairs to watch closely, in this article we will list several such pairs based on scheduled economic data releases and compelling EdgeFinder analysis. Based on these two categories, here are 4 pairs to watch next week.
1) GBP/CAD (Receives a -7, or ‘Strong Sell’ Signal)
On Tuesday, September 20th, Statistics Canada will be releasing a variety of month-over-month and year over year CPI data for August. On Thursday, September 22nd, the Bank of England (BoE) is forecast to hike the Official Bank Rate by 50 basis points, issuing a corresponding monetary policy summary as well. The Bank of Canada has been far more hawkish as of late than the BoE, so unless there are any bullish surprises, this pair seems likely to continue its bearish trend.
2) GBP/CHF (Receives a -7, or ‘Strong Sell’ Signal)
Along with the aforementioned BoE upcoming monetary policy decision, the Swiss National Bank (SNB) will also be deciding on a new policy rate on Thursday, September 22nd. The SNB is expected to implement a rate hike of 75 basis points, doing away with the precedent of negative interest rates. These expectations have seen this pair fall to historically significant lows, as can be glimpsed on the 1-week timeframe above.
3) GBP/USD (Receives a -6, or ‘Strong Sell’ Signal)
This pair presents another opportunity to sell GBP, since the Federal Reserve will be adjusting the Federal Funds Rate on Wednesday September 21st, as well as issuing accompanying economic projections and a related statement. Fed Chair Jerome Powell currently shows no signs of relenting from hawkishness as a 75 basis point rate hike is forecast. With support being tested, we will see whether the BoE or the Fed could present a catalyst for a breakout to the downside.
4) USD/JPY (Receives a 4, or ‘Buy’ Signal)
Along with the upcoming Federal Reserve decision, the Bank of Japan (BoJ) will also make a monetary policy decision this week. If the BoJ continues to keep their Policy Rate below-zero, further abstaining from rate hikes as currently forecast, this could usher in even more bullish momentum for this pair. Depending on how the Fed’s move meets or contrasts with market expectations, USD/JPY could yet again touch, or break out above, trendline resistance.
(More) Bad News for the United Kingdom
This morning, at 2 am Eastern Time, the UK’s Office for National Statistics reported that month-over-month Gross Domestic Product (GDP), a key measure of economic output, had failed to meet forecasts. While markets and analysts had expected 0.3% or 0.4% growth, the reality was a disappointing 0.2%. Though not a contraction, it is yet another in a long list of unfortunate national events ranging from double-digit annual inflation to the death of Queen Elizabeth II.
With newly elected Prime Minister Liz Truss taking the reigns at a time of great economic suffering, and a still-wary Bank of England unable to halt supply-side woes, there is little certainty to be found for the Pound Sterling. With fundamentals, institutional sentiment, and technical analysis pointing towards continued GBP bearish momentum, let’s explore which GBP pairs have the best selling potential.
Top Three Pairs to Sell
According to the EdgeFinder, A1 Trading’s market scanner software, the three most promising pairs to sell are all GBP pairs. All three are experiencing months-long downtrends, with recent bullish price action retesting key levels in the form of resistance. Here they are, along with their respective EdgeFinder signals:
1) GBP/USD (Earns a Score of -7, or ‘Strong Sell’)
2) GBP/CHF (Earns a Score of -7, or ‘Strong Sell’)
3) GBP/CAD (Earns a Score of -7, or ‘Strong Sell’)
Forex traders had a fair bit of news to chew on this morning. All eyes were on the European Central Bank as they implemented an anticipated 75 basis point rate hike followed by a press conference, after which the world was treated to yet more commentary from Fed Chair Powell. Perhaps sliding under the radar was positive labor market news for CHF, with Switzerland’s unemployment rate beating expectations by falling to 2.1%. This joins a long list of reasons to consider going long on the Swiss Franc, as CHF might be underrated.
The Swiss Economy’s Strength
Switzerland boasts many economic factors weighing in its favor, including its hot labor market, CHF’s safe haven reputation, and GDP growth in spite of a recession-prone global economy. In many ways it is comparable to Japan’s economy, as both are high performing, export-heavy economies that are historically comfortable with negative interest rates due to low inflation relative to other countries.
However, one crucial difference between the two in terms of fundamentals is that the Swiss National Bank has proven willing to hike interest rates recently, whereas the Bank of Japan has thus far put off such a move. With Switzerland’s annual inflation still creeping up, currently hovering at 3.5% (a thirty-year high), more tightening could potentially be on the menu.
Best CHF Pairs to Trade
According to the EdgeFinder, A1 Trading’s market scanner tool, the following three pairs may be worth selling for CHF bulls. Here are the pairs, along with their respective EdgeFinder ratings:
1) GBP/CHF (Earns a -6, or ‘Strong Sell’ Rating)
2) NZD/CHF (Earns a -6, or ‘Strong Sell’ Rating)
3) AUD/CHF (Earns a -5, or ‘Sell’ Rating)
At 2 am Eastern Time today, the United Kingdom’s Office for National Statistics reported that annual inflation has officially crossed into the double digits for the first time since 1982. In July, year-over-year CPI in the UK beat expectations by rising 10.1%, while year-over-year Core CPI (which excludes volatile food and energy prices) similarly beat market forecasts by increasing 6.2%. While high inflation of this magnitude is typically a bullish indication for a currency, implying rampant growth which must be slowed through higher interest rates, there is reason to believe that is not the case here. This is primarily because a) the UK’s economy is contracting, and b) the Bank of England has thus far been too timid to be effectively hawkish. With this in mind, let’s discuss the EdgeFinder’s top 4 pairs to sell today, which happen to all be GBP pairs.
This pair makes the top of the bearish list, earning a -8 or ‘strong sell’ signal from the EdgeFinder. This is because the US economy’s fundamentals are better than the UK’s (except for severity in GDP contraction), trader sentiment heavily favors USD, and both trend reading and seasonality (historical performance this month) indicate bearishness.
This pair also earns a ‘strong sell’ signal, or -6. Most variables favor CHF due to the Swiss economy’s resilient performance in contrast to that of the UK. COT data and interest rate divergence are the only categories that don’t support this signal because institutional traders have similar sentiment regarding these currencies, and the Swiss National Bank has not had to confront high inflation.
Earning yet another -6 or ‘strong sell’ signal, all categories but two favor CAD due to Canada’s economic stability and hawkish central bank. Only seasonality favors GBP, along with the UK’s superior unemployment rate (currently 3.8% to Canada’s 4.9%), though Canada’s has been declining.
This pair earns a milder, but still significant, ‘sell’ signal at -5. All listed fundamentals lean in AUD’s favor, while both institutional and retail sentiment remain neutral, with only seasonality supporting GBP.
Why Sell USD?
While many USD bulls (including myself) think that bullish momentum in the US Dollar Index has a ways to go before buying pressure is exhausted, there is a compelling argument that this is not the case. First, the United States economy officially met the criteria for a technical recession as of Thursday morning: two consecutive quarters of GDP contraction, which is bearish for USD in theory.
Second, Fed Chair Jerome Powell gave ambiguous comments at the FOMC press conference this past Wednesday, which many analysts and traders interpreted as subtly dovish. If true, this would be monumentally bearish for USD, considering US inflation remains at 40-year highs. For those interested in shorting the US Dollar, here are three major pairs that the EdgeFinder, an A1 Trading tool for supplemental analysis, signals as opportunities for selling USD.
1) Sell USD/CHF
With a rating of -6, earning a ‘strong sell’ signal, fundamentals currently favor CHF for the most part, between Switzerland’s 2% unemployment rate and growing economy. The only strike against it is currently COT data, with a higher percentage of institutional traders buying USD rather than CHF.
2) Sell USD/CAD
With a rating of -4, earning a ‘sell’ signal, fundamentals are somewhat mixed for the pair, and are especially unique considering that the US is one of Canada’s primary trading partners. However, retail sentiment, seasonality, and trend reading currently weigh in CAD’s favor.
3) Buy NZD/USD
With a rating of 4, earning a ‘buy’ signal, fundamentals currently favor NZD in light of New Zealand’s 3.2% unemployment rate and smaller economic contraction, as well as their exports. While institutional and retail sentiment don’t favor NZD, seasonality and trend reading do.
How To Monitor USD
For those who are interested in keeping tabs on USD fundamentals and sentiment before trading major pairs, investing in the EdgeFinder will help you keep up with the latest economic data, COT data, and more. Use this link if you would like to purchase the EdgeFinder, or perhaps try it out for free.
USDCHF continues embarking on yet another climb this week after previously finding support at the 0.95 zone, as depicted on the 1 Day timeframe above. This is the third time this has happened since April of this year, each prior occurrence connecting with the 1.00 resistance zone, followed by price action reversal. The odds of it testing the 1.00 resistance zone yet again seem reasonable, especially when considering how most (74.36%) institutional traders are currently shorting CHF according to last week’s COT data. What, then, makes the Swiss Franc enticing to buy? The truth is, there is a lot for CHF bulls to be excited about long-term; let’s discuss 4 reasons to buy CHF.
Safe Haven Reputation
The European and worldwide economic crises that unfolded over the past decade and a half have cemented CHF’s status as a safe haven currency. This is due to many factors, including Switzerland's remarkable economic conditions (that we will discuss shortly), robust trade relations with the EU, and a promising currency valuation in contrast to the debt crises that have plagued various other European countries, according to Forbes (read more here).
The buying pressure resulting from the Swiss Franc’s safe haven reputation is so present that is has proven itself to be a pervasive thorn in the side of the Swiss National Bank (SNB), Switzerland’s central bank, for years. The SNB has gone above and beyond to stave off undesired CHF appreciation by many means, including zero/negative interest rates, pegging CHF against EUR until 2015, and frequently intervening in foreign exchange markets as a CHF bear, for the sake of trade convenience.
The Swiss economy claims certain particularly coveted features that set it apart from many other developed counterparts. While the country benefits from economic highlights such as stable GDP growth, an impressive 2% unemployment rate, and mild-to-modest inflation (in part due to monetary stimulus), the nuances of Switzerland’s economic performance are far more unique than this data alone reflects. For one, Switzerland’s economy boasts a median income and GDP per capita among the highest in the world, boosted by substantial trade surpluses due to plentiful exports to the EU, its primary trading partner. On top of this, other factors that set it apart include a huge services sector, an unusually highly skilled labor force, a powerful pharmaceutical industry (which accounts for a large chunk of exports), and agricultural protectionism.
While Switzerland’s reliance on European, particularly German, demand can be perceived as a liability, especially nowadays as Russian tensions and hyperinflation in the eurozone could possibly curb demand for Swiss products, it nonetheless remains a long-term perk. The EU’s economy remains powerful even facing threats of stagflation, and the European Central Bank (ECB) has recently proven cautiously open to rate hikes. Also, annual inflation in the eurozone is currently more than twice as hot as in Switzerland, and wages for European workers aren’t static, leaving some breathing room for CHF to continue rising against EUR without negative trade consequences.
Higher Interest Rates
A recent variable that has thus far created more CHF bullishness is the SNB’s shocking decision in June to implement a surprise 50 basis point interest rate hike to combat rising Swiss inflation. While the SNB’s target interest rate remains below zero at -0.25%, this was nonetheless an unexpected pivot from years of expansionary precedent. That Switzerland’s 3.4% year-over-year inflation would prompt a contractionary response that aggressive is certainly bullish for CHF, since it attests to a distinctively hawkish change of tune from the SNB.
Less FX Intervention
Another crucial abandonment of precedent from the SNB is a recent departure from its years-long strategic devaluation of CHF against other currencies. As mentioned previously, the SNB has regularly weakened the Swiss Franc via foreign exchange markets, selling CHF to purchase other currencies, such as EUR, in order to optimize export affordability for Switzerland’s trade partners. This standard appears to have changed within the past several weeks, as many analysts are interpreting the SNB to have abandoned this mode of CHF intervention altogether in favor of tackling inflation concerns, allowing buying pressure for the Swiss Franc to potentially advance unchecked. This is shockingly bullish for CHF and may have long-term bearish implications for EUR as well (read more here).
Best Pairs to Trade
While CHF bulls have much to be enthused about in terms of fundamentals, shorting USDCHF could be interpreted as playing with fire. They are both respected safe haven currencies, and the Swiss Franc has no history as the world’s reserve currency. Rather, minor pairs may prove to be far safer bets for conservative traders. For example, shorting EURCHF has potential due to the SNB no longer providing artificial support for the pair, which has just plummeted to its lowest levels since 2015. CHFJPY is likewise at its highest level since 2015. While Japan is comparable to Switzerland in terms of being a flourishing export economy with low unemployment, ultraloose monetary policy, and a safe haven reputation for JPY, the Bank of Japan has not revealed a firm pivot towards hawkishness just yet, which is bullish for CHFJPY.
Price action for USD pairs was fascinating today as the DXY reflected bearish momentum that saw a low of nearly 102.15 intraday. This selloff was stopped at approximately 8:30 a.m. Eastern Time when eager buyers sent it soaring, eventually over the 103.3 level. Several factors were at play here, including important European Central Bank news and expectations for new US CPI data tomorrow. I took this opportunity to trade USDCHF this morning; it went well, and I entered and exited the trade in under an hour. Below I explore my process, and why I day traded USDCHF.
In many ways, the fundamentals favor CHF: Q1 GDP growth in Switzerland was positive unlike for the US, unemployment is 1.5% lower than in the US, and year-over-year inflation is gradually climbing. However, the Swiss National Bank currently has its key interest rate at -0.75%, compared to the Federal Reserve’s 1%, which involved a 50 basis point rate hike. On top of this, both CHF and USD are historically safe haven assets, and USD has encountered recent bearish data and increased chances at volatility due to upcoming US CPI data (perhaps indirectly through today’s ECB announcements as well). Thus, I decided I felt comfortable enough to go long on USDCHF as a day trade, but not confident enough to sit in it for too long.
I felt that there were enough technical indications here to warrant a brief long position. On the 1-hour timeframe, the price moved rapidly outside the Keltner Channel walls, and met significant support in two places: the 0.972 zone and the trendline pictured. I interpreted this bearish candlestick as a hasty reaction to meeting resistance around 0.98 (a reaction that could be short lived in light of potential for USD volatility). Thus, I entered at the 0.973 level, and took profit just above the 0.978 level, since I was not confident it could break through 0.98 resistance.
Sentiment analysis also made me feel comfortable entering the position. According to A1 Trading’s EdgeFinder, recent COT data reveals 76% of institutional traders going long on USD, whereas just over 10% are going long on CHF. In contrast, less than 1/3 of retail traders are long on this pair. These are all incredibly bullish signs for USDCHF, making me feel confident in my purchase, especially as Switzerland grapples with neighboring eurozone issues and with today’s arguably banal ECB decision. However, given my aforementioned uncertainties about the pair’s fundamentals and mutual safe haven status, I still planned on an early exit.