chf fundamentals

US Dollar Swiss Franc Exchange Rate Forecast

Wednesday, 03 June 2009 09:56:51 GMT  |  Jamie Saettele, Senior Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst

US Dollar / Swiss Franc Monthly Technical Forecast



The USDCHF count is the same as the EURUSD count (but as the inverse). There are 2 competing counts, one that calls for formation of a low prior to 1.0367 and one that gives scope to a drop below 1.0367 before a bottom and reversal (100.37, where wave c and a would be equal, is support in the second scenario). In the case of the latter, the current decline would be wave 3 of C and would extend from near current price. Only a rally above 1.0957 would suggest that a low is in place.


US Dollar / Swiss Franc Interest Rate Forecast

The Swiss Franc historically has seen historically interest rates have very little impact on price action as it’s typically serves as a safe-haven. Therefore, risks trends generally have a greater impact on USD/CHF sentiment, but with traders seeking safety in U.S. treasuries has led to a reversal in this relationship. The Swiss Franc has continue to strengthen against the dollar as risk appetite has gained, but how long will that relationship hold

 

Overnight Index Swaps show expectations that Federal Reserve interest rates will grow 0.75 percentage points against their Swiss counterparts in the year ahead and overnight swaps pricing in cut of 10 bps. The SNB’s desire to devalue the franc will keep interest rate expectations anchored. Therefore, if we start to see a U.S. recovery start to take form, then we could see the spread continue to widen which could be a supportive factor for the pair.

The Swiss Franc historically has seen historically interest rates have very little impact on price action as it’s typically serves as a safe-haven. Therefore, risks trends generally have a greater impact on USD/CHF sentiment, but with traders seeking safety in U.S. treasuries has led to a reversal in this relationship. The Swiss Franc has continue to strengthen against the dollar as risk appetite has gained, but how long will that relationship hold

 

Overnight Index Swaps show expectations that Federal Reserve interest rates will grow 0.75 percentage points against their Swiss counterparts in the year ahead and overnight swaps pricing in cut of 10 bps. The SNB’s desire to devalue the franc will keep interest rate expectations anchored. Therefore, if we start to see a U.S. recovery start to take form, then we could see the spread continue to widen which could be a supportive factor for the pair.

US Dollar / Swiss Franc Valuation Forecast

USDCHF Valuation Forecast: Bullish



On balance, the outlook for the Swiss Franc position is much the same as that of the Euro: the currency’s substantial overvaluation against the US Dollar bolsters other catalysts working in the greenback’s favor, most notably a leg up on fiscal and monetary stimulus. Switzerland’s dependency on external demand as a key driver of economic growth further bolsters the argument that the mountain nation will lag in the recovery. The recent selloff in the Dollar has widened the disparity between spot and the PPP-implied exchange rate, offering bulls an increasingly attractive entry point once growth and yield considerations re-capture traders’ attention.

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.

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