Dollar Rally Halted, Swiss Franc Outshone Euro

Euro ended the week broadly higher, with help from ECB’s historical rate hike. Yet, it was outshone by Swiss Franc, which was the biggest winner after SNB reiterated the stance of welcoming Franc’s appreciation. Canadian Dollar followed as the third, also after another massive hike by BoC.

On the other hand, Yen was the worst performer. There was some support from jawboning of Japanese officials. But there is little chance of a rebound considering policy divergence with other major central banks. New Zealand Dollar and US Dollar were the next. The greenback has started reversing some recent gains and risk sentiment improved.

Euro’s underlying strength in doubt despite ECB’s historical hike

Euro ended broadly higher after ECB delivered a historical 75bps rate hike. EUR/USD reclaimed parity after forming a short term bottom at 0.9863. But there is still some doubt about the underlying strength of Euro.

Firstly, Euro clearly underperformed the Swiss Franc. EUR/CHF’s decline last week suggests rejection by 55 day EMA. Rebound from 0.9550 was kept below 38.2% retracement of 1.0512 to 0.9550 at 0.9917. Both keep outlook in EUR/CHF bearish for another fall through 0.9550 at a later stage, to resume larger down trend.

Secondly, while EUR/GBP’s rally looked promising, it’s still capped below 0.8720 resistance, and struggled to break through medium term fibonacci resistance at 38.2% retracement of 0.9499 to 0.8201 at 0.8697. A break below 0.8565 support will indicate another rejection by 0.8697, and bring another fall as the third leg of the pattern from 0.8720.

Thirdly, EUR/CAD also stayed range bound last week, struggling to break through 55 day EMA, and capped below 1.3271 near term resistance. The development keeps outlook bearish for another fall through 1.2867 at some point to resume the larger down trend.

Swiss Franc strong as SNB said appreciation helps

Comparing to Euro, Swiss Franc’s strength is so far more apparent. Markets are expecting another 50bps rate hike by SNB on September 22, with possibility of a 75bps move. More importantly, SNB Chairman Thomas Jordan reiterated last week that “at the moment it is rather so that given the inflationary pressure an appreciation of the franc tends to help rather than hurt.” The willingness for Franc to rise is a key factor helping it rise.

GBP/CHF’s down trend continued last week and breached 2020 low at 1.1107. But unlike GBP/USD’s reaction to 1.1409, there is no sign of a bounce yet. Outlook will stay bearish as long as 1.1244 minor resistance holds. Firm break of 1.1107 will pave the way to 200% projection of 1.3070 to 1.2134 from 1.2598 at 1.0726.

CHF/JPY’s up trend also resumed last week and surged to as high as 148.45. While Yen recovered notably on Friday, CHF/JPY’s retreat was so far very shallow. Consolidations should be relatively brief as long as 146.90 minor support holds. Break of 148.79 will target 100% projection of 127.48 to 143.73 from 137.13 at 153.38, which is around the spike hike made in 2015 after SNB suddenly removed the cap on Franc’s exchange rate.

Dollar reversed gains as risk market well digested Fed’s next hike

As for Dollar, it reversed some of recent gains on improving risk sentiment. Investors seemed to have well digested another 75bps hike by Fed on September 21. Fed fund futures are now pricing in 91% chance of that. Yet, US stocks staged a strong rebound, ending a three-week losing streak.

S&P 500’s close above 55 day EMA, and 4000 handle, was a positive sign. Stronger rebound is mildly in favor back towards 4325.28 resistance. But it should be noted that price actions from 3636.87 are probably forming the second leg of the corrective pattern from 4818.62 (the first leg was the three-wave move from 4818.62 to 3636.87). The second leg of a corrective pattern tends to be rather unpredictable, in terms of size, duration, and pattern. So, it won’t be surprising to see sentiment flip-flops again.

Dollar index should have formed a short term top at 110.78. Near term risk is mildly on the downside, for deeper pull back towards 55 day EMA (now at 107.12). But there is no clear sign of reversal as long as it stays well inside the medium term rising channel. Another rally through 110.78 is still expected at a later stage.

But considering the possibility of bearish divergence condition in daily MACD, sustained break of the channel support (now at around 106), could indicate the start of a medium term correction back to 104.63 support and below. If that happens, it should correspond to a break of 1.0368 resistance in EUR/USD.

AUD/USD Weekly Outlook

AUD/USD dipped to 0.6698 last week but recovered ahead of 0.6680 low. Initial bias is mildly on the upside this week for 55 day EMA (now at 0.6919). Sustained break there will target 0.7135 resistance next. On the downside, decisive break of 0.6680 will resume larger down trend.

In the bigger picture, price actions from 0.8006 (2021 high) is seen more as a corrective pattern to rise from 0.5506 (2020 low). Or it could also be a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7135 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

In the long term picture, rejection by 0.8135 resistance suggests that the long term down trend from 1.1079 (2011 high) is not ready to reverse. Yet, the structure of the fall from 0.8006 still argues that it’s a corrective move. Hence, break of 0.5506 low is not envisaged for now. The long term outlook stays neutral first, and will be reassessed later after the fall from 0.8006 completes.