USD/CHF trades like a proxy for perceived US recession risk

• USD/CHF has been strongly correlated with US interest rate markets over the past month
• As a known safe haven, that makes it a candidate to trade perceived US recession risks
• ISM services PMI key market event on Monday
• A beat may deliver greater upside for USD/CHF than downside on a miss

USD/CHF: Safe haven with an eye on US rates

There are few FX pairs with a greater sensitivity to US interest rate expectations than USD/CHF, making it an excellent candidate for traders to look at ahead of the key US ISM services PMI that will be released later in the session.

Much like USD/JPY which I covered earlier, the rolling daily correlation between USD/CHF and US rates markets has been incredibly strong over the past month, sitting with scores of more than 0.9 with year-ahead rate cut expectations and US two, five and 10-year Treasury yields. Reflecting its safe haven status, the correlation with Nasdaq futures has also been strong at 0.89 over the same period.

With markets fretting about a potential US downturn following last Friday’s nonfarm payrolls report, it makes the Swiss franc a great way for traders to play recession probabilities.

ISM services may intensify rout or spark reversal

As seen from the report card from the ISM report for June, there was a broad weakening in activity with business activity and new orders contracting at faster rates while growth in new export orders slowed sharply.

Source: Institute of Supply Management

If the July report worsens further, it’s likely recession fears will amplify considering we’re talking about the largest and most important industry group in the United States economy. And with no other top economic data for markets to digest this week, the tone from this report may last far longer than what would otherwise be the case.

USD/CHF nears December 2023 lows

After the abruptness of recent market moves, you get the sense that while there’s two-way directional risk from the report, the largest reaction may come from an upside surprise that may spark a collective rethink about the prospects for a US recession. That logic is applicable to USD/CHF.

Looking at USD/JPY on the daily, you can see it’s often respectful of former levels, allowing for traders to assess trade setups depending on how the price action evolves.

Having done away with support at .87287 on Friday, it has taken out the lows struck in January today, leaving .84518 as the next port of call before a potential retest of the December 2023 lows. Should the latter go, there’s almost nothing to speak of visually until you get down to .74427, the lows hit in the immediate aftermath of the EUR/CHF peg being abandoned by the Swiss National Bank in early 2015.

On the topside, should we see a sharp unwinding of US recession trades, look for a potential squeeze back to .87287. RSI (14) is extremely oversold at 19.98, underlining why a better-than-expected ISM report could deliver more upside than a worse-than-expected print on the downside.

-- Written by David Scutt

Follow David on Twitter @scutty