US Dollar Swiss Franc Exchange Rate Forecast

An examination of the wave structure since the 2008 low reveals that the long term trend is most likely up. Think of everything since then as a massive bullish base from which the USDCHF will explode higher. In Elliott, this state is referred to as a series of 1st and 2nd waves. After plunging for weeks, the USDCHF found support near its former 4th wave extreme (circled), which is common. Look higher this month.

Swiss Franc / US Dollar Interest Rate Forecast

U.S. yield expectations have sunk so low that it has seen its spread advantage over the Swiss Franc reverse from +42 in June to the current -15. The SNB traditionally maintains a low target rate as it looks to surpass the Franc’s valuation in order to make exports more attractive. Switzerland’s dependence on European demand has seen its currency move in lock step with its regional counterpart making it more susceptible to Euro-zone fundamentals than its own metrics. Therefore, Franc traders may want to monitor ECB rhetoric until we see the currencies decouple.

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Forecast: Bullish

As with the Euro, the Franc pushed deeper into overvalued territory against the Dollar in recent weeks, encouraged by both broad-based USD weakness and the SNB’s increasingly softening stance on FX market intervention. The landscape going forward doesn’t look forgiving however: a slowdown in the Euro Zone – the destination for over 60 percent of Swiss exports – promises to keep economic growth lackluster and is likely to see the Fed more ahead of the SNB on monetary tightening. Indeed, baseline economic forecasts compiled by Bloomberg suggest GDP growth in the States will outpace Switzerland by 0.8 percent on average through 2012. The exchange rate is also dangerously close to overvalued extremes, tracking 18.1 percent above fair value, meaning that a reversal is likely sooner rather than later. On balance, current USDCHF weakness seems to point toward a buying opportunity in the near to medium term.

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.