CHFJPY On Track To Hit 1990 Highs
Saxo Bank | Oct 30, 2013 03:52AM ET
We recently blogged about the growing risks of JPY strength. In this article, we made the case that while we looked for the positive risk appetite to continue in the near future thanks to the US Federal Reserve's asset-purchase tapering likely being pushed into 2014, risks of a correction lower in Japanese stocks and USDJPY were growing.
Our focus on the Japanese currency was, however, more centred on USDJPY in terms of potential yen strengthening. Looking elsewhere in the yen universe, we have observed that CHFJPY has reached an interesting point, where the cross is trading at multi-year highs not seen since 1990.
While both the Swiss franc and the yen are broadly perceived to be safe-haven currencies, the overall balance of the two is such that the currency cross has a general tendency to trade with a positive correlation to the broader risk sentiment. With USD broadly on the backfoot and the general risk appetite positive ahead of tomorrow's Federal Open Market Committee (FOMC) rate setting meeting, CHFJPY is in a good position to see further upside gains in the near term. With CHFJPY now at this interesting point, below we provide a technical outlook for the pair.
CHFJPY trading with a strong overall technical bullish bias
CHFJPY continues to trade with a strong bias to the upside. The close above the high from August 2011 at 108.72 and the subsequent bidding over the past few trading days has given scope for further upside acceleration. On the short-term horizon, the pair has made a double bottom formation, which would be confirmed with a daily close above the 109.55 level. Such a close, in turn, would yield a short-term technical target of 110.49. Further out on the upside, the pair is set to target 1990 highs, coming in at 115.96 should this be turned into more sustained rally.
In terms of potential option plays into this strong upside technical development, one can look at a one-month maturity, zero cost, risk-reversal option structure (with indicative strikes), where a purchase of a 110.35 strike CHFJPY call is financed by a sale of a 108.60 strike CHFJPY Put. For a more limited risk structure with no short option exposure, one can target the break of the above mentioned double bottom, neckline confirmation level of 109.55 with a one-week CHFJPY call option at an indicative cost of 38 yen pips (spot reference 109.26).
For the overall technical picture to shift into a decisively bearish outlook, a daily close below 101.82 is called for. Such a close would also encompass a closing below the 23 percent retracement in the bigger wave of 78.36-109.74 and would give scope for a deeper correction and enable a test of the 97.97 support.
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On the very short-term horizon, some corrective downside pattern could be expected if the spot manages to close below the 108.55 level for a potential test of a 106.66 support level.
CHFJPY at multi-year highs
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