Swiss Franc / US Dollar Monthly Technical Forecast
A multi-week consolidation has been broken to the downside, with the market recently breaking to fresh 2009 lows below 1.0590. This is suggestive of some bearish continuation and now opens the door for a drop towards parity over the coming weeks. Next support comes in by 1.0370 and a break back above 1.1025 will now be required to take pressure off of the downside and shift structure.
Swiss Franc / US Dollar Interest Rate Forecast
Negligible US Dollar/Swiss Franc interest rate differentials have meant that the USDCHF remains largely removed from shifts in rate forecasts. Interest rate traders anticipate that the US Dollar will yield over 100 basis points more than the Swiss Franc in 12 months’ time—normally a positive sign for a given currency. Yet the USDCHF trades near important lows, and FX traders have shown little concern over yield developments. It may be far more significant to monitor another important fundamental theme: central bank intervention.
The Swiss National Bank has defended the important SFr 1.5000 mark on several different occasions, and open-market intervention may continue to sway the USDCHF as well. It remains critical to monitor SNB rhetoric and actions.
Swiss Franc / US Dollar Valuation Forecast
On balance, the outlook for the Swiss Franc is much the same as it was last month: the currency’s substantial overvaluation against the US Dollar bolsters other catalysts that are expected to eventually work in the greenback’s favor, most notably the SNB’s commitment to keep a lid on the currency’s appreciation as a bulwark against the onset of deflation. Switzerland’s dependency on external demand (particularly from the EU) as a key driver of economic growth is also of note, suggesting a recovery for the mountain nation is contingent on a return to growth in other countries and all but assuring that interest rates will be slower to rise there than in the States. The recent selloff in the Dollar has widened the disparity between spot and the PPP-implied exchange rate, offering bulls an increasingly attractive entry point once growth and yield considerations re-capture traders’ attention.
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 Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.
