Shifting Interest Rates Are Giving Traders Big Opportunities

This past year, aggressive rate rises saw the Fed Funds target rate jump from 0.25% to 5.0%.

That pushed up consumers’ borrowing costs to the highest levels since 2007.

Yet it’s easy to forget that in other parts of the world, rates remained low. In fact, in some countries they were still negative.

For example, Switzerland’s cash rate only turned positive last September when the Swiss National Bank (SNB) increased rates.

Changes in interest rates like this affect much more than just stock or bond prices. It also has a big influence on currencies.

So today, I want to see how this played out for the Invesco CurrencyShares Swiss Franc Trust ETF (FXF). And we’ll look at what we can expect from here…

Ratchet Rates Higher

Currencies are always quoted in pairs. The chart of FXF below shows the Swiss franc against the U.S. dollar. Each bar represents a week of price action.

When FXF is falling, the Swiss franc is weakening against the U.S. dollar. And when FXF rises, the Swiss franc is strengthening against the U.S. dollar… much like we saw from late 2019 into 2020.

That rally in the Swiss franc coincided with the U.S. Federal Reserve cutting rates while the SNB kept theirs steady…

Invesco Currency Shares Swiss Franc Trust ETF (FXF) – Weekly Chart

Source: eSignal

After topping out in early 2021, however, FXF began to slide.

This reversal occurred as we saw a growing divergence between FXF’s price and buying momentum (orange lines)…

FXF continued to rally (higher highs). But the Relative Strength Index (RSI) made lower highs, showing that buying momentum was waning.

FXF drifted lower as the RSI (momentum) remained stuck in the lower half of its range (below the green line).

That move lower accelerated when the Fed began to ratchet rates higher in March 2022. We also saw the 10-week moving average (MA, red line) bearishly slump below the 50-week MA (blue line).

A brief rally into June coincided with the SNB’s initial rate rise. Then, FXF pulled back before bottoming out and rallying again.

This rally came off the back of the SNB’s September 0.75% rate rise. And it was propelled further by another two 0.5% rate rises since (sending the Swiss cash rate to a positive 1.5%).

Take another look at the chart…

Invesco Currency Shares Swiss Franc Trust ETF (FXF) – Weekly Chart

Source: eSignal

This central bank action was also backed up by the RSI…

As the chart shows, the RSI made higher lows (red line) meaning that buying momentum was trending higher. FXF burst higher as the RSI broke back into the upper half of its range.

The RSI briefly tested and held support (green line). And FXF again rallied strongly in March with the 10-week MA soaring above the 50-week MA.

However, the RSI (red circle) is now approaching overbought territory (upper grey dashed line). So, what can we expect from here?

Strong Momentum

With such strong buying momentum behind it, FXF could soon test its early 2020 high ($103.81).

For that to happen, we’ll need to see the RSI remain tracking in its upper range… and the 10-week MA continue to accelerate above the 50-week MA.

However, we also need to keep an eye out for any reversals. That’s why what happens next with the RSI will be key.

If the RSI reverses lower out of overbought territory, then FXF could be due for a quick pullback. That could provide the setup for a potential short trade… even if it’s against the overall uptrend.

The trick is to be nimble… and always be ready to take our profits when we see them.

The swings on charts like FXF reinforces just how lucrative trading currencies (aka forex or FX) can be. It can offer big opportunities no matter what the stock market is doing.

But it’s important to know how to trade them. I’ve personally traded over $500 billion in currencies over 35-plus years during my career.

That’s why tomorrow night at 8 p.m. ET, I’m holding a special event called Currencies in Crisis…

I’ll share the strategies I’ve used (and the pitfalls you need to avoid) to successfully trade this unique market. And I’ll explain why we’re currently in a new period of opportunity in forex.

To check it out, all you need to do is RSVP by clicking right here. That will automatically add your name to the attendee list.

I look forward to seeing you there!

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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