Although the road has been long and fraught with challenges, Swiss officials are starting to see their aggressive monetary activities bear fruits as the light at the end of the tunnel for policy emerges. With inflation on the mend and growth accelerating, the recent depreciation in the Franc has only helped the Central Bank reach its goals. Even amid a more precarious global financial market backdrop, the Swiss National Bank’s extreme accommodation has eliminated to a large degree problematic inflows. Helping further reduce the attractiveness of the Franc has been the relentless rally in the US dollar over the past three weeks, with the currency rising to an 8-month high against a basket of currencies. With rate hike expectations continuing to rise amid more hawkish comments from the Federal Reserve, the upside run in USD/CHF may still be in its early stages.

Franc Haven Appeal Deteriorating

When first announced, Switzerland’s negative rate regime brought a significant degree of scorn and criticism. Many analysts and economists were more concerned about the risks than the potential rewards of such a strategy. With much attention focused on the policy’s failing in other regions like Japan, Swiss rates need to be put in context that is more befitting the Alpine nation.For one, Switzerland has long been considered a political and economic safe haven. During times of turmoil, investors have a tendency to select assets that they believe will outperform or store value. Thanks to Switzerland’s haven status, the Franc has long been viewed within this frame of reference. However, as the data shows, despite looming global financial risks, investors are not fleeing to the Franc in droves.

In Switzerland’s case, negative rates have helped keep the Franc competitive in global financial markets, evidenced in large part by the latest trade figures.According to the Swiss Customs Administration, the September trade surplus printed at heights not seen in years, climbing to CHF 4.37 billion. Besides the biggest figure on record (record-keeping began in 1988), the surplus was driven by exports surging by 10.30% year over year while imports grew by 3.70% over the same period.Although inflation has not yet recovered to positive territory, the deflationary tide of the last 25-months appears to be ebbing, with the base effect of rising energy prices likely to provide a supportive backdrop for consumer prices.Further gains in the USD/CHF pair could also contribute to the upside in prices as a weaker Franc translate to more expensive imports.

During periods of significant financial stress, Swiss assets were historically viewed as a port in the storm. However, the appreciation that ensued in the Franc choked off economic activity, creating problems for the Alpine nation. Now, the environment is significantly more comfortable, with pressure easing on policymakers thanks to rising speculation that the United States Federal Reserve will be raising interest rates during the December meeting. The increased probability of one rate hike before the end of the year has fueled a substantial rise in the US dollar and by extension reduced the value of the Franc. Furthermore, traditionally dovish Chicago Federal Reserve President Charles Evans has highlighted the potential for three rate hikes before the end of 2017, a development that would likely see the US dollar rally to endure over the medium-to-long term.

Technically Speaking

Since breaking out from the longstanding symmetrical triangle consolidation, the USD/CHF pair has been on a tear higher, supported in large part by three straight weeks of gains in the US dollar. The momentum has been so significant that the stochastic oscillator has been trending in overbought territory for a significant time while the RSI is rapidly approaching the 70.0 overbought area. While these two indicators may suggest a near-term retreat from the momentum higher, a pullback during the latest move using the Fibonacci levels implies a retracement towards 0.9860 to 0.9773. Any dip below the secondary level might imply a reversal to the downside, especially if the price action is accompanied by heightened trading volumes and volatility. However, standing in the way of any significant retreat are both the 50 and 200-day moving averages acting as support.

Trending below the price-action are the moving averages which could add to the bullish case for USD/CHF over the medium-term. Besides both acting as support against any prolonged correction in the currency pair, they coincide with the 61.8% Fibonacci level. Furthermore, should the 50-day moving average cross the 200-day moving average to the upside it could be viewed as an especially bullish signal for the outlook. If both moving averages are trending higher when this occurs, it could be interpreted as a “golden cross” which is normally accompanied by significant upside momentum.Finally, with USD/CHF approaching the upper bound of a horizontal range with support at 0.9530, a candlestick close above longstanding resistance between 0.9955 and 0.9960 on the daily chart could pave the way for additional gains.