Potential trade: selling CHF/JPY

Potential trade idea: sell CHF/JPY at 115.10, with a stop loss at 117.10, and a potential profit target at 113.00.

Technically the pair looks like it is to see lower levels, with stochastic momentum headed lower and the MACD - not just below the signal line, but also zero.

On Thursday, CHF/JPY printed a sizeable bearish reversal on the daily chart, with the weekly chart also printing a key reversal as well. On the hourly chart though the pair is clearly oversold, so I would look for a slight rally to achieve a better entry. I recently looked at being short on this pair at 116.35 and this is performing well, so I would lower the potential stop on this trade from 117.80 to 117.10.

Strong support is seen at the March 28 low of 115.85, so a close below here would open up further weakness.

Interestingly the weakness in CHF has predominantly been caused by the ECB, with the market speculating that if we do see the ECB cutting the deposit rate (the rate it charges banks to hold funds with the central bank) then the Swiss National Bank (SNB) will look to follow suit and penalise the rate it charges banks to hold funds with them. This would actually be fairly affective, with Swiss banks much more likely to migrate funds away from the SNB, potentially causing capital outflows and subsequently CHF weakness.

It’s worth bearing in mind that if the market really does price in negative deposit rates from the ECB then CHF will even underperform the EUR. This is largely because the Swiss banking sector commands a much larger share of GDP that what eurozone banks do.

The SNB continues to talk down the CHF, while on the other side of the coin the BoJ seems fairly comfortable with how the Japanese economy is fairing. This in theory should keep the JPY supported and the CHF weak.

Any sell-offs in the S&P 500 and developed markets should put downside pressure on the pair.

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