In yesterday’s blog post we noted that the USD while in a big downtrend but there was a “Warning in the Bond Market rally” that the probability of a USD rally is increasing as US bond yields firm. In this article, we look at the outlook for EUR/USD and USD/CHF.
10 US Year Interest Rate V EUR CHF Bonds
US Interest rates are on the rise in US Bonds as yields rise. Yields have risen strongly and are now trading well above the 1% level at 1.14%. This yield is attractive to investors against other bonds particularly those in Euro Zone which have a negative yield on them. If the yield stays above the 1% level the USD has limited downside and if it rallies further the USD mount a big rally in our view.
There is a view in the market that the euro will hit 1.25 or 1.27 but this is unlikely. It didn’t get there in 2017 when euro fundamentals were a lot more bullish – with the ECB talking about raising rates and the Eurozone economy outperforming in terms of economic data but now the outlook is much bleaker for the zone.
At present European PMIs, inflation, and economic data are underperforming in the US, there are greater lockdowns in the EU which will impact on economic growth going forward. We also have the ECB being more accommodative in terms of stimulus as measured by central bank assets to GDP, and we have negative interest rates and bonds with a negative yield as well.
Investors are heavily short the USD against all major currencies and hold their biggest short position since 2011 which points to a rally. In terms of the EUR Its already made a top on the chart below – we now see upside as limited and a major break to the downside coming key technical levels to watch below:
EUR/USD DAILY CHART: The EUR has fallen below the up-sloping trend line and has fallen below the 1.2200 level. We expect any rallies to fail back to resistance levels indicated and if we break nearby support, we expect a move down to 1.1800 with a possible run down to 1.1600 longer term.
Last week the pair fell to its lowest since January 2015, on broad-based USD weakness and at present has rallied up from its lows. Swiss interest rates are negative 0.75% (Below the rates in euro zone) and the 10-year bond also has a negative yield of 0.50 so from an interest rate perspective Switzerland is extremely unattractive.
We also know the Swiss National Bank are concerned about Swiss Franc strength and will intervene in FX markets to cap the CHF’s strength. In USD/CHF, traders hold one of their biggest short positions in over a decade and we expect them to exit on stop and trigger a major rally. The key technical levels to look out for are on the chart below:
USD/CHF DAILY CHART: We are holding above the 0.8800 level and volatility is low – we expect a move above the 0.8920 level to trigger an upside rally on higher volatility to the 0.9200 as the large speculative position which is short is taken out on stop – on a breakout stop protection should be behind the 0.8800 level in our view.
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