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USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

2011-04-08 19:14:00
Jamie Saettele, CMT, Ilya Spivak,
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Swiss Franc / US Dollar Monthly Technical Forecast

Monthly Chart

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

Prepared by Jamie Saettele

The USDCHF is at an all time low and there are no points of reference to gauge support until a downward sloping support line which is not until the low 80s (8300 this month). 9200 and 9300 are near term resistance levels and the larger bearish bias remains valid as long as price is below 9784 (January high).

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Forecast: Bullish

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_04062011_CHF.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

The Franc pushed deeper into overvalued territory through March, with the disparity between spot and the PPP-implied “fair” exchange rate now the second-largest in the G10 (after the Australian Dollar). Rising oil prices unexpectedly pushed the inflation to a 10-month high at 1 percent in February, hinting that rate hike bets will have scope to grow, but the next SNB meeting is not until June. In the meantime, an increasingly hawkish tone from the US Federal Reserve is likely to keep market chatter focused on Ben Bernanke and company, hinting the greenback has scope to close some of the value gap. The net outcome of these competing forces remains uncertain however. The distinct possibility of another flare-up in Euro Zone sovereign risk also complicates the situation, promising to drive the Franc higher (along with the Pound) as capital seeks an alternative regional medium of exchange to the single currency. On balance, much seems to be uncertain and although overall positioning is decidedly USDCHF bullish from a pure valuation-based perspective, a cautious wait-and-see posture seems prudent for the time being.

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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