Swiss Franc Strengthens on Coronavirus Risk-Off Mode

Swiss Franc Strengthens on Coronavirus Risk-Off Mode
January 28, 2020

 

The euro dollar continues to decline against the Swiss franc after Germany’s Ifo institute reported an unexpected decline in the business sentiment index. The downtrend was also aided by the market’s switch over to risk-off mode due to increasing concerns over the spread of coronavirus across the globe. The lack of interference from the Swiss National Bank after the currency was included in the ‘manipulation’ watchlist also enabled the franc to rally unabated against the euro. From a high of 1.0716, the EUR/CHF pair declined to a low of 1.0675 in the past 24 hours. The currency pair is trading at a three year low.

German business sentiment worsened at the beginning of 2020, mirroring a gloomy outlook for the upcoming months. The business climate index declined to 95.90 in January, from 96.30 in December, as per survey data published by the Ifo Institute. Economists had anticipated the reading to rise to 97.0.

The German economy is beginning 2020 in a guarded spirit, Ifo President Clemens Fuest opined. Similarly, ING economist Carsten Brzeski stated that Ifo index reading is a disturbing caution against very early optimism. He further noted that the economy is in the final stage of bottoming out, avoiding spillover of manufacturing weakness to the labor market.

Last week, the IMF (International Monetary Fund) downwardly revised Germany’s growth outlook for this year, pointing to weakness in the manufacturing sector. The global lender now anticipates the economy to expand by 1.1% in 2020 and 1.4% next year.

As per Ifo’s survey, the current conditions index increased slightly to 99.1, from 98.7 in the earlier month. Economists had anticipated a reading of 99.  However, the expectations index declined to 92.90 in January, from 93.90 in the prior month. The reported figures missed expectations for the index to rise to 94.50.

The business sentiment improved considerably in the manufacturing sector. Current estimation improved to the best level since February 2017, and enterprises were less negative about forthcoming months.

However, the service sector saw the indicator decline significantly in January, mainly due to limited anticipations. In trade, the business sentiment improved in January on overall improvement in the current scenario and anticipations. The business sentiment in the construction sector weakened as estimation about the current environment dropped to the lowest level since June 2018, and the companies were more cynical about upcoming months.

While the weak economic data from Germany encouraged the euro dollar selling, the outbreak of coronavirus, which originated in China’s Wuhan city, has created a risk-off sentiment in the market. According to official news reports, at least 81 people have lost their lives so far, and 2,744 have been infected. Similar cases have been identified in Australia, Japan, France, Nepal, Malaysia, Singapore, Taiwan, South Korea, the United States, Thailand, and Vietnam.

According to the World Health Organization (WHO), Coronaviruses are a big family of viruses that give rise to sickness varying from common influenza to critical illness such as Severe Acute Respiratory Syndrome (SARS) and the Middle East Respiratory Syndrome (MERS). The latest coronavirus is referred to as novel coronavirus (2019-nCoV), the seventh one to cause illness in humans. The outbreak is expected to have a negative impact on the global economy. This has prompted the market to find cover under safe-haven assets such as the franc.

Earlier this month, the US Treasury placed the Swiss franc under the currency watch list. The move has discouraged the Swiss National Bank (SNB) to take aggressive steps to keep the franc weak. With a lack of interference from the SNB, the franc continues to rally with little opposition. The weak economic data from Germany, coronavirus outbreak, and addition of the franc to currency manipulator watch list is expected to keep the EUR/CHF pair bearish in the short-term.

The US Treasury has called on the Swiss government to cut taxes and spend more public money after it added the country to a watchlist of those it accuses of currency manipulation. The Swiss franc nudged up to a near three-year high against the euro on Tuesday as markets anticipated the move would limit the Swiss National Bank’s appetite for aggressive action to try to hold down its currency in the future.

Technically, the EUR/CHF pair is declining after facing resistance at 1.0750. The next major support is anticipated near 1.0635. Furthermore, the stochastic oscillator is in the bearish zone. Therefore, we are anticipating the currency pair to decline further in the short-term.

EUR - technical analysis - 28th Jan 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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