Potential signal:
- I would sell this pair at ¥165.50, with a stop loss at ¥166.50.
- The target would be ¥162.40 underneath.
The Swiss franc initially rallied during the trading session on Friday, reaching toward the 168 you level before turning around. The Japanese yen has been brutally strong against most currencies, and the Swiss franc was never going to be any different. Because of this, it’s not a huge surprise to see that the market is hanging around the ¥166 level, an area that we have seen support at more than once. If we were to break down below this area, it’s very likely that the market could fall pretty significantly.
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Carry Trade
This is a pair that is very important to pay close attention to because it gives us an opportunity to look at the carry trade. After all, the carry trade is something that is highly sensitive to risk appetite, and this pair is a great way to determine which currency you want to short against a higher yielding one in order to take advantage of any carry trade opportunities. In this example, you can see that the Swiss franc is most certainly weaker than the Japanese yen, so I would be looking to buy a higher yielding currencies against the Swiss franc, assuming that risk appetite returns. While you could still make money shorting the Japanese yen in that environment, you are going to make more by shorting the Swiss franc.
Keep in mind that the Swiss franc is highly sensitive to what’s going on in Europe, because Switzerland sends 85% of its exports into the European Union, which of course is struggling in general, except for the fact that Germany and France do seem to be turning back around. However, the market is likely to continue to be very noisy, and I think the Swiss recently cutting interest rates by 50 basis points suggest that Switzerland is going to continue to see a lot of weakness going forward. After all, the SNB doesn’t cut rates like that without reason.
With all that being said, I still favor the Japanese yen over the Swiss franc, but I also recognize that this could change. The meantime though, if we see the Japanese yen continue to strengthen, it could raise quite drastically against the Swiss franc.
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