USD/CHF analysis: death cross forms amid hopes of jumbo rate cut

The USD/CHF continued its steep freefall on Friday after the US jobs report raised the likelihood of a jumbo interest rate cut by the Federal Reserve. It has crashed for four straight days and moved to its lowest point since February 2nd and is down by over 7% from its highest point this year. 

Jumbo interest rate cut

The USD/CHF exchange rate was in the spotlight this week as the Federal Reserve delivered its closely watched interest rate decision. In it, the bank decided to maintain interest rates steady as most analysts were expecting.

The Fed also hinted that the door to slash interest rates was open as long as the labor market worsened and inflation continued falling. Recent economic numbers have confirmed these fears.

Earlier this week, the Bureau of Labor Statistics (BLS) said that the country’s vacancies dropped to the lowest point in over two years in May. In another report, ADP said that the economy’s private sector created over 122k jobs in July. 

The most important data was released on Friday when the BLS published the non-farm payroll (NFP) data. This report revealed that the economy added just 114,000 jobs in July while the unemployment rate rose to 4.3%. The jobless rate was worse than what most analysts were expecting.

According to the report, manufacturers created 1k jobs while the government added 17,000 workers in July. Meanwhile, the closely-watched earnings numbers remained under intense pressure during the month as they softened to 0.2% and 3.6%. 

Additional recent data showed that the US inflation was falling recently. The headline Consumer Price Index (CPI) dropped to 3.0% in July while the core figure moved to 3.2%. These numbers will likely continue falling in the next few months now that the unemployment rate is rising.

Therefore, analysts believe that the Fed will start slashing rates in September. While most of them are expecting a 0.25% cut, others are calling for a jumbo cut, which is interpreted as a 0.5%. In a recent statement, Jerome Powell said:

Swiss National Bank cuts

The USD/CHF pair, therefore, crashed because all attention was on the Federal Reserve instead on the Swiss National Bank (SNB). The SNB was among the first developed country central banks to start cutting interest rates earlier this year.

These cuts were important for the pair because of the carry trade that has long existed between the US and Japan.

A carry trade is a situation where investors borrow money from a low-interest country to a higher-interest one. To some extent, the SNB cuts were bullish for the pair, which explains why it rose to 0.9225. 

This trend happened because the cuts widened the spread between the US and Swiss interest rates. Now, with the Fed set to start cutting, investors have started to do away with that trade.

Looking ahead, there will be several important Swiss data to watch next week even though their impact on the pair will be limited. The statistics agency will publish the latest unemployment rate and retail sales data on Tuesday. 

Switzerland’s unemployment rate has remained at 2.3% while recent data showed that retail sales have grown at a slow pace recently. The other data to watch will be the consumer climate figure by SECO. 

In the US, the only data that will come out and impact the USD/CHF pair will be the services and composite PMI report. Economists expect the S&P Global report to show that the services PMI dropped to 56 while the composite one fell to 55. 

USD/CHF technical analysis

The USD to CHF exchange rate peaked at 0.9221 in May this year after the Swiss National Bank started cutting interest rates. It has then started forming a series of lower lows and lower highs, signaling that bears are in control.

The pair finally crossed the important support at 0.8830, its lowest point on June 18th last week as the sell-off intensified. Most importantly, it has formed a death cross as the 200-day and 50-day moving averages made a bearish crossover pattern. In technical analysis, this is one of the most bearish patterns.

Meanwhile, the Relative Strength Index (RSI) has continued its downtrend and moved to the extreme oversold level of 22. Other oscillators like the Stochastic, Money Flow Index (MFI), and the MACD have sunk to an extreme level. 

Therefore, the path of the least resistance for the pair is bearish, with the next point to watch being at 0.8500. More downside below that will increase the possibility of it slumping to 0.8335, its lowest point in December last year. The alternative scenario is where it bounces back as bulls buy the dip.