US Dollar / Swiss Franc Exchange Rate Forecast

Having held the November low, the USDCHF traded above its November high in December.  This marked the first month since March that the prior month’s high was broken (March broke February’s high).  There is no change to the longer term structure in which the decline from the 2008 high is a 3 wave correction that will eventually be fully retraced.  Near term, it is unclear whether or not a first wave is complete or whether one more high is likely to complete the first wave (like the EURUSD).  In any case, it is probable that a bullish base is forming that will propel the USDCHF much higher.  10590 and 10700 are potential resistance levels.


A jump in the US Dollar/Swiss Franc exchange rate has largely coincided with a similar improvement in Dollar rate forecasts, but the USDCHF has otherwise moved independently of interest rate developments through recent trade. As two of the lowest-yielding major world currencies, the US Dollar and Swiss Franc have shown little correlation through their rate differentials and are likely to continue doing so until we see a substantive shift in interest rates.

The US Dollar currently holds somewhat of an advantage over the Swiss Franc as interest rate traders predict the US Federal Reserve will raise rates more aggressively through the coming year. Yet the difference is relatively minor, and we would need to see fairly aggressive central bank moves to really encourage yield-seeking speculators to bet against either currency. 


The Franc has retreated below the 20% overbought extreme threshold in December but prices remain over 2300 pips away from their PPP-implied exchange rate. The Swiss unit suffered a relatively sizable 3.5% loss in last month and the interest rate forecast continued to put the Fed well ahead of the SNB, hinting that both momentum and yield considerations favor further weakness (USDCHF gains). Still, as with the Euro, the big question will be whether the market returns to the risk vs. safety dichotomy that characterized much of the previous year or extend the shift towards a focus on economic fundamentals that began to take root towards the final weeks of 2009. The former scenario would offer some support to the Swissie, while the latter would allow for the greenback to extend its rebound. On balance, our bias remains bullish.


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.