USD/CHF drops to five-week lows amid risk-off, lacks follow-through

• USD/CHF failed to capitalize on its modest intraday uptick to levels just above the 0.9200 mark.
• The risk-off impulse in the markets benefitted the safe-haven CHF and exerted some pressure.
• Elevated US bond yields revived the USD demand and helped limit further losses for the major.

The USD/CHF pair retreated over 25 pips from the early European session swing highs and dropped to the lowest level since mid-September, around the 0.9180 region in the last hour.

The pair struggled to preserve its modest intraday gains to levels just above the 0.9200 mark and has now drifted into the negative territory for the third successive day. The risk-off impulse in the markets benefitted the safe-haven Swiss franc, which, in turn, was seen as a key factor that prompted fresh selling around the USD/CHF pair on Thursday.

Worries about potential contagion from China Evergrande's debt crisis resurfaced after the heavily indebted developer said on Wednesday that a $2.6 billion stake in its property services unit failed. This, in turn, tempered investors' appetite for perceived riskier assets and drove flows towards traditional safe-haven currencies, including the CHF.

Meanwhile, the intraday pullback seemed rather unaffected by a modest pickup in the US dollar demand, which drew some support from elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond held steady near the 1.67% mark, or the highest level since May amid expectations for an early policy tightening by the Fed.

This week's dismal US macro releases – Industrial Production and housing market data – pointed to weakening economic activity. Investors, however, seem convinced that a faster than expected rise in inflation might force the Fed to adopt a more aggressive policy response and have been pricing in the possibility of a rate hike in 2022.

Hence, it will be prudent to wait for a strong follow-through selling before placing fresh bearish bets and positioning for an extension of the recent leg down witnessed over the past three weeks or so. Next on tap will be the US economic docket – featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims.

This, along with a scheduled speech by Fed Governor Christopher Waller and the US bond yields, might influence the USD price dynamics. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the USD/CHF pair.

Technical levels to watch