• Swiss National Bank surprised markets by cutting its benchmark rate, leading to a weakening of the Swiss Franc.
• March CPI fell to 0% month-on-month, lower than expected, indicating potential underperformance of Swiss Franc.
• Technical charts suggest weaker CHF scenario, particularly against EUR, GBP, and JPY.
• CHFJPY looks extremely overbought, and is an attractive short opportunity. It is trading at all time highs, and 5% above its previous high in 1979.

The Swiss National Bank (SNB) was the first major central bank to cut interest rates since November 2020. In March, the SNB cut its benchmark rate by 0.25% to 1.5%.

This move surprised the markets, as the majority of analysts were expecting the central bank to keep its interest rate unchanged. The Swiss Franc weakened by about -1% against its major peers as a result.

Today, perhaps as a vindication that the SNB made the correct call, the March CPI fell to 0% month-on-month, versus +0.6% in the previous month, and compared to analysts' expectation of +0.3%.

To put things into context, analysts were expecting a weak CPI number already, given the dovishness of the central bank in its March interest rate meeting. However, they were not expecting such a steep fall in inflation.

After being one of the best performing major currencies for months, it now looks like the Swiss Franc is setting up to underperform.

Aside from the change in central bank policy, the technical charts are also supporting a weaker CHF scenario.

The key charts to look at would be the CHF against the EUR and GBP, given the proximity of the countries and their interconnectedness.

EUR/CHF has now broken above its downtrend resistance dating back to March 2021.

Weekly Chart: EUR/CHF

GBP/CHF is now testing a key pivot of a 1.5 year base. It looks likely to have put in a double bottom here. We could see more consolidation here as this is a key level, but I would expect GBP/CHF to break above the 1.15 pivot sooner rather than later.

Weekly Chart: GBP/CHF

AUD/CHF has broken out of an 8 month base. This rebound is occurring at a key level, with the currency pair seeing a rebound in the same area back in March 2020.

Weekly Chart: AUD/CHF

USD/CHF is still making lower highs and lower lows, hence I will not choose this pair to short the CHF. This could be due to the market expecting the Fed to cut interest rates this year as well.

Weekly Chart: USD/CHF

The pair that I am most excited about is CHF/JPY. Both currencies have traditionally been used as carry trade FX due to their low interest rates. Short either of them and long a higher interest rate currency and voila - positive carry.

However, CHF/JPY looks overstretched. It is now trading at all time highs, even above its 1979 highs. Also, occurring at the same time is the Bank of Japan (BOJ) raising interest rates for the first time in 17 years, bringing the benchmark interest rate of -0.1% to 0%.

While this move may not be significant optically, it now puts both central banks at direct odds with one another. One is leaning hawkish, and the other is dovish.

Quarterly Chart: CHF/JPY

Traders will now have to decide which currency they prefer to choose as a "lending currency" if they put on a carry trade position.

While the interest rate in Japan is still lower, but the differential may quickly narrow if the SNB continues on its rate cut trajectory.

In addition, the BOJ has made repeated attempts to intervene in the markets to strengthen the JPY (both verbally and through FX intervention), while the SNB has promised to intervene if the CHF is too strong.

Given this dynamic, the risk-to-reward looks more attractive to choose the CHF as a lending currency over the JPY. Even if CHF/JPY falls -5% from here, it will still be above its previous all time high in 1979.

Throwing in the RSI on the lower panel of the CHF/JPY chart below, we may observe that CHF/JPY is the most overbought in history, and put in a tentative candle in the last quarter. It is also bumping against uptrend resistance here.

Quarterly Chart: CHF/JPY

I think the risk-reward is attractive to go short CHF and long JPY here, with target at low 130s, where there is decent structural support. This represents a potential 20% move. My stop loss would be above 180.

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