usd-chf
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The USDCHF decline reversed just pips from its 100% extension of the decline 1.1973 (1.1973 – (1.2303-1.0367)). The daily close above the wave C channel resistance line is bullish as is the divergence with rate of change at the low. 1.0590 is potential resistance but an objective is 1.1025 (former 4th wave extreme).
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 64 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.
The disparity between fair value and spot has continued to widen, with the Franc now trading at premium of over 2800 pips above its PPP-implied exchange rate to the US Dollar. As with the Euro, however, early signs of a forthcoming downward correction across global equity exchanges hint that an upward push may be in the cards as risk aversion boosts the safety-linked US Dollar.
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.
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