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  • USD/CHF has been on the front foot in recent trade and is eye a test of the psychological 0.8900 level.
  • USD has found decent demand on Tuesday, amid a defensive/cautious feel to broader trade.

USD/CHF currently trades higher by about 30 pips or just over 0.4% in the 0.8890s, with sellers having come into play ahead of the 0.8900 level and capping the gains. USD is the best performing G10 currency on the day so far this Tuesday amid a more defensive feel to trade, hence the gains being seen in USD/CHF. Safe-haven CHF and JPY have been holding up comparatively well vs the likes of EUR, GBP and other more risk-sensitive currencies, however.

Markets on the defensive Covid-19, Brexit concerns linger

European equities admittedly managed to close with solid gains on Tuesday, as they played catch up to recovery from lows seen in US equities late during Monday’s US trading session. They are mostly still trading with substantial losses on the week, however, and the broader feel to trade on Tuesday is still quite defensive; the S&P 500 currently trades around 0.2% lower and is back under 3690, crude oil markets (WTI -1.8%) and industrial metals are also lower, while in FX markets risk-sensitive EM currencies and the likes of AUD and NZD are underperforming. Meanwhile, safe-haven USD is the best performing G10 currency (DXY back above 90.50) and bond yields are lower (US 10-year down 2bps to 0.921%).

The VIX futures curve is in mild contango prior to February (meaning near-term contracts are higher than longer-term contracts), indicative that markets are worried volatility could pick up in the coming weeks amid the potential spread of the new, more transmissible Covid-19 on the loose in the UK internationally, or that the vaccine won’t be effective against the new strain. Other lingering concerns include continued Brexit uncertainty and the January Georgia Senate run-off race, which could hand a majority to the Democrats.

Technical buying also feeding into USD/CHF gains

USD/CHF broke to the upside of a medium-term downwards trend channel that had been in play for most of December on Monday. The pair had been flirting with the upper bound of this trend channel, a downtrend linking the 7, 11 and 16 December highs for most of the session, but in recent trade has decided to move back towards the north and is eyeing a test of the 0.8900 level. Beyond the 0.8900 level is Monday’s high at 0.8919 and then the 21-day moving average at 0.8940.

USD/CHF four hour chart