Interest rate differentials signal uptrend in AUD/CHF pair

So far in November, the Australian dollar has been on a steady decline against the Swiss Franc. The forced shut down of steel mills, which began in September and will run until March, to control pollution in China during winter time has already softened the price of iron ore and coking coal.

That kept the Aussie on a downtrend against the Franc and almost all other G10 currencies.

However, we anticipate a trend reversal in the days to come, on the basis of the facts provided below.

Last week, the Australian Bureau of Statistics reported that the economy added 3,700 jobs in October, down from an upwardly revised 26,600 jobs in the previous month. Analysts were expecting an addition of 17,800 jobs in October.

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Despite lower job additions, the unemployment rate dipped to 5.4% in October, from 5.5% in the earlier month. Analysts were expecting an unemployment rate of 5.5%. Similar to June quarter, the wage price index grew only 0.5% in the September quarter. The market was expecting a wage price increase of 0.7%. That would certainly result in a postponement of a rate hike by the Reserve Bank of Australia. Nevertheless, the interest rate differential is still considerably higher than other countries and Switzerland in particular.

The Swiss Franc, in the meanwhile, is declining as strong US earnings and Senate’s approval of the tax reform bill has increased the risk appetite among investors and has reduced the demand for safe haven assets such as the Swiss Franc. The Swiss National Bank also considers its currency as highly valued. Thus, it continues to talk down the currency and also intervene physically, as and when required. In fact, currency interventions have resulted in a ballooning of reserves to 742 billion Swiss Francs ($747.76 billion), which is 14% higher than the Switzerland’s total economic output. Thus, the SNB is rather pleased with the weakening of the Swiss Franc in recent times and supports further decline. Thus, economic data and related developments favor a rally in the AUD/CHF pair.

The AUD/CHF pair is trading near a major support level of 0.7440. Further, the RSI of moving average is indicating an oversold scenario in the H4 time frame. Thus, we can expect a short-term recovery in the AUD/CHF pair.

We may open a long position in the currency pair to benefit from the predicted uptrend. The preferred level of entry is 0.7470. Likewise, the ideal exit level seems to be 0.7620 where the major resistance exists. To limit losses, we wish to place a stop loss order below 0.7380.

Additionally, we are also considering opening a call option trade using the platform offered by one of the binary brokers listed here. In order to set up the trade, we require the currency pair to trade near 0.7470. Further, the option should be active until November 28.