US Dollar/Swiss Franc Long-Term Exchange Rate Technical Forecast
A 5 wave advance from .9634 is viewed as the first bull leg in a multi-year uptrend. The sharp drop from 1.23 is the bulk of the correction in terms of price but not time. The rally from .9634 took 9 months and this is just the second month of the corrective decline. A near term possibility (next few weeks) is that the USDCHF drops below 1.04 in order to complete an A wave within an A-B-C drop from 1.23. A choppy and time consuming B wave would then follow.
US Dollar/Swiss Franc Exchange Rate Interest Rate Forecast
The US Dollar/Swiss Franc exchange rate has been extraordinarily volatile as of late, and recent US interest rate decreases have completely erased the dollar's interest rate advantage over the Swiss Franc. The Swiss currency previously held the second-lowest domestic rate of any G10 currency, and traders could receive carry interest rate payments if they bought US dollars against the Franc. That has recently changed, however, and shifted the balance of power in the USD/CHF.
Given that both the US Dollar and Swiss Franc effectively have zero-percent interest rates, it stands to reason that rate expectations will have little bearing on USD/CHF price action. Indeed, interest rate traders forecast that the USD/CHF differentially will effectively remain unchanged in the coming 12 months. Our interest rate-based bias remains neutral
US Dollar/Swiss Franc Exchange Rate Valuation Forecast
US Dollar/Swiss Franc Valuation Forecast: Bullish
The Swiss Franc is the most overvalued currency against the US dollar by a wide margin, standing over 5000 pips above its implied PPP exchange rate. On the other hand, momentum favors USDCHF downside as the Franc took the crown for best performance thus far in December, adding 4.97% against the greenback. It should be kept in mind however that in a similar fashion to the Euro, SSI sees open interest down over 30% since the end of November, casting doubt on the significance of the latest down move. Interest rate expectations point to an inactive SNB, giving the dollar an advantage as the Fed lifts rates by at least 50 basis points over the next 12 months. On balance, valuation analysis points to USDCHF upside.
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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.
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