chf fundamentals

US Dollar - Swiss Franc Exchange Rate Forecast

Tuesday, 03 February 2009 18:47:52 GMT  |  Jamie Saettele, Senior Currency Strategist; David Rodriguez, Quantitative Analyst; Ilya Spivak, Currency Analyst

US Dollar - Swiss Franc Monthly Technical Forecast

A 5 wave advance from .9634 is viewed as the first bull leg in a multi-year uptrend. Like the EURUSD, there is a question as to whether or not wave 2 is complete. Staying above 1.0861 keeps short term bullish prospects bright. A drop under there would favor weakness below 1.0367 in order to complete wave 2.

US Dollar - Swiss Franc Interest Rate Forecast

US Federal Reserve and Swiss National Bank yield differentials have had relatively little impact on the USD/CHF, and future rate expectations are likewise unlikely to force major shifts in the currency pair. The US Dollar and the Swiss Franc are now two of the three lowest-yielding currencies in the G10 group; both the SNB and the Fed have effectively set their respective rate targets near 0 percent. It is subsequently unsurprising to note that yields have had little effect on the USD/CHF, and currently modest rate forecasts for both central banks suggests we can expect similar dynamics in the year ahead.

According to Overnight Index Swaps, traders predict that the US Fed will raise rates by a cumulative 51 basis points through February, 2010. The Swiss National Bank is by comparison expected to leave rates unchanged, and the small shift provides a marginally bullish bias for the USD/CHF. All the same, such a small shift in yields is unlikely to carry a major impact as compared to broader US dollar price movements.

US Dollar - Swiss Franc Valuation Forecast

The Swiss Franc remains the most overvalued currency against the US dollar by a wide margin, standing close to 5000 pips above its implied PPP exchange rate. Although it is on par with the Yen as a low yielder and seems like it should be benefitting from an exodus out of risky assets, the Franc has underperformed, losing 8.6% against the greenback where the Yen added nearly 1%. If the US Dollar continues to attract safety-bounded capital, the USDCHF looks likely to continue on its way higher to correct the current imbalance.

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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