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USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

2011-03-09 15:08:00
Joel Kruger, David Rodriguez, Ilya Spivak,
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Swiss Franc / US Dollar MonthlyTechnical Forecast

Weekly Chart

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_swiss1.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

Prepared by Joel Kruger

The latest break to fresh record lows by 0.9200 is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for a weekly close back above 0.9330 to confirm outlook and accelerate gains. Back below 0.9200 delays.

Swiss Franc / US Dollar Interest Rate Forecast

Currency, Central Bank

US Dollar, US Federal Reserve

Swiss Franc, Swiss National Bank

Net USDCHF Spread

Signal

1-Year Expectations(Basis Points)

35

44

(9)

Bearish

Yield in 1 Year(Percent)

0.60

0.52

0.08

Bullish

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_Picture_2.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

Lackluster yield forecasts for both the Swiss Franc and US Dollar have meant that the USDCHF has moved mostly independently of yield developments. Instead, safe-haven demand for the Swiss currency seems to be the primary driver of CHF price moves. The Swiss Franc continues to trade at or near record highs against the Euro and US Dollar, and it would likely take a substantive shift in yield expectations to force any real corrections in the USDCHF.

We accordingly believe that yield expectations remain less relevant for the USDCHF than other currency pairs and will instead continue to monitor moves in the US S&P 500, sovereign credit risk in the euro zone, and ongoing geopolitical turmoil in the Middle East.

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Forecast: Bullish

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_03092011_CHF.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

The Franc pushed deeper into extreme overvalued territory in February, with USDCHF now trading 25.7 percent below its PPP-implied fair exchange rate. In the near term, the gap looks likely to grow wider as unrest in the Middle East and the return of sovereign fears in the Euro Zone bolster safe-haven demand for the Swiss currency. Furthermore, the beginnings of a turn higher in inflation readings since November suggests the SNB is likely to hold back from resuming intervention against the exchange rate even as it marches higher. On balance, while the valuation landscape points to a bullish USDCHF outlook, it will likely be some time yet until a meaningful reversal materializes.

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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