USD/CHF: Dollar softens despite a surge in Treasury yields

• Safe-haven flows likely to head Swiss franc and gold’s way as US debt concerns and liquidity concerns grow
• A week filled with Fed speak will see Wall Street focus on Fed Chairman Jerome Powell’s speech on Thursday
• Empire Manufacturing contracted in October: -4.6 vs -6.0 eyed; Outlook for prices fell to a 3-year low

Something doesn’t seem right on Wall Street.  The dollar is falling even as Treasury yields at the long-end of the curve surge as uncertainty persists on stickier inflation fears and rising debt levels. Much attention remains on the Israel-Hamas war, which is seeing diplomatic efforts try to prevent this war from expanding.

It is clear that the surge in commodities and rising default risks will drag down earnings expectations. It seems this is as ugly as earnings expectations are going to get.  Despite efforts to prevent the Israel-Hamas war from spreading into the Middle East, Wall Street is hesitant to go full bull mode given the deteriorating profit outlook for this earnings season. Upside for stocks should be limited given all the geopolitical uncertainties. 

US Data

The latest Empire Manufacturing survey showed activity returned to contraction territory. Both prices paid and received eased, supporting the case that the disinflation narrative is in place.  The manufacturing sector is close to stabilizing, but for that to continue energy prices need to cool down.  The upcoming week of economic data is expected to show the US economy is slowing.  US retail sales are expected to show inflation and dwindling bank accounts led to softer consumption.  Any upside surprises will be associated with strong back-to-school sales buying and the end of the peak summer travel season with Labor Day vacationing.  

USD/CHF Daily Chart

Price action on the USD/CHF daily chart is breaking below two key support levels, the uptrend line that started in early August and below the 200-day SMA.  King dollar might struggle for safe-haven flows against the franc.  If Treasury market liquidity concerns remain the primary driver for the bond market, the franc could rally towards the 0.8600 level.  Major upside resistance remains at the 0.9200 level.

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