Swiss Franc / US Dollar Monthly Technical Forecast
The pair is in the process of carving out a major base and the risks are for continued appreciation over the coming weeks towards key medium-term resistance at 1.2300, which represents the neck-line of a major double bottom. For now, look for any setbacks to be very well supported ahead of 1.1200, with any dips towards this area viewed as a formidable opportunity to build on existing long positions.
Swiss Franc / US Dollar Interest Rate Forecast
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.
Swiss Franc / US Dollar Valuation Forecast
USDCHF Valuation Forecast: Bullish
As with the Euro, the Franc has retraced lower by a good amount but remains overvalued against the US Dollar. The path of least resistance continues to point lower (implying USDCHF gains) as the Swiss currency maintains its historically strong link with the single currency. Indeed, Switzerland counts on the Euro Zone for over 60 percent of its export market, so a protracted slowdown there robs the mountain nation of a major catalyst in its own recovery. While a correction seems reasonable given the scope of recent moves, the bottom line from a valuation standpoint 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.
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