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US Dollar - Swiss Franc Technical and Fundamental Forecast for June

US Dollar - Swiss Franc Technical and Fundamental Forecast for June

2011-06-07 18:39:00
David Rodriguez, Ilya Spivak, Jamie Saettele, CMT,
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Swiss Franc / US Dollar Technical Forecast

Monthly Chart

060711_us_dollar_swiss_franc_technical_and_fundamental_forecast_for_june_body_usdchf.png, US Dollar - Swiss Franc Technical and Fundamental Forecast for June

Prepared by Jamie Saettele

The USDCHF has reached a trendline that extends off of the March and May lows of this year, a trendline that extends off of the 1987 and 1995 lows and is nearing a trendline that extends off of the 2004 and 2008 lows (log scale)! The confluence of lines indicates potentially strong support at the current level. What’s more, price has extended to a point below its 12 month moving average that often leads to formation of a low. Lows in 1987, 1990, 1992, 1995, and 2008 occurred within 2 months of the USDCHF being 12% to 14% below its 12 month average. In April, the USDCHF was 12.42% below its 12 month average.

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)

18

31

(13)

Bearish

Yield in 1 Year(Percent)

0.43

0.37

0.06

Bullish

060711_us_dollar_swiss_franc_technical_and_fundamental_forecast_for_june_body_Picture_4.png, US Dollar - Swiss Franc Technical and Fundamental Forecast for June

The US Dollar/Swiss Franc currency pair has hit fresh record lows, but interest rate differentials have had little net effect on the pair and seem less relevant going forward. Both the US Federal Reserve and the Swiss National Bank are expected to leave interest rates effectively unchanged through the coming year, keeping the USDCHF yield spread near zero.

It remains far more significant to monitor any and all shifts in ongoing European sovereign debt crises and its effects on the safe-haven Swiss Franc. The CHF continues to power to fresh highs against both the euro and US Dollar as investors seek the relative safety of the neutral European currency. If we see relative resolution to ongoing Greek troubles, the CHF could see a noteworthy pullback.

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Forecast: Bullish

060711_us_dollar_swiss_franc_technical_and_fundamental_forecast_for_june_body_06072011_CHF.png, US Dollar - Swiss Franc Technical and Fundamental Forecast for June

The Franc is second only to the Australian Dollar in terms of its overvaluation vis-à-vis the US Dollar, with USDCHF trading 32.5 percent below its PPP implied exchange rate. The currency is becoming increasingly correlated with gold prices, suggesting the uncertainty that still prevails across financial markets with regard to the path of the fragile global recovery will keep the Swiss unit supported through the near term. The key question going forward is whether the rise in US yields following the expiration of QE2 will materially derail or only slow economic growth in the world’s largest economy. If the former proves to be the case, the subsequent risk aversion is likely to see the Franc extend its advance. Alternatively, in the latter scenario, the greenback has scope to erase some of the glaring valuation disparity as confidence in the continuity of economic normalization following the 2008 crisis (albeit at a slower pace) refocuses traders’ attention on interest rates and allows the Dollar to capitalize on a narrowing yield differential between itself and CHF.

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.

Written by Jamie Saettele, CMT, Sr. Technical Strategist; David Rodriguez, Quantitative Strategist; and Ilya Spivak, Currency Strategist for DailyFX.com

We always want to hear your feedback on DailyFX articles. Want more content like this? Less? What do you want to see? Send e-mails to drodriguez@dailyfx.com, ispivak@dailyfx.comand jsaettele@dailyfx.com.

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