USDCHF Monthly Technical Forecast
Price action has been extremely choppy, but overall, our bias remains constructive with the market attempting to put in series of medium-term higher lows and higher highs since basing by 0.9635 in 2008. A fresh higher low is now sought out by 1.1165 to be confirmed on a break back above 1.2300. Below 1.1165 will delay recovery prospects and expose a deeper setback to the 1.1000 area, while back above 1.1740 encourages advance towards 1.2300.
USDCHF Fundamental Outlook/Interest Rate Forecast
The US Dollar/Swiss Franc currency pair has historically shown relatively little correlation to interest rate differentials, and recent price action has shown no different. The Swiss National Bank has matched its US counterpart in taking interest rates down to zero percent, and it is little surprise to note that movements in yield forecasts have had little effect on the USD/CHF.
Overnight Index Swaps show expectations that Federal Reserve interest rates will grow 0.71 percentage points against their Swiss counterparts in the year ahead. Such an interest rate advantage would arguably boost the USD/CHF currency pair, but it will be far more important to gauge broader US dollar trends. Recent price action has shown the USD/CHF decline when the S&P 500 rallies, and we expect this to continue to be the case through the foreseeable future.
Swiss Franc – US Dollar Valuation Forecast
On balance, the Swiss Franc’s position is much the same as that of the Euro: the currency’s substantial overvaluation against the US Dollar bolsters other catalysts working in the greenback’s favor, most notably a leg up on fiscal and monetary stimulus. While the Franc has undoubtedly sold off over the past 12 months, the valuation outlook suggests that ample room remains for USDCHF upside.
What is Purchasing Power Parity?
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in RED, while those that are overvalued are denoted in GREEN.
