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USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

2011-07-07 00:11:00
Joel Kruger, David Rodriguez, Ilya Spivak,
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Swiss Franc / US Dollar Technical Forecast

Monthly Chart

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

Prepared by Joel Kruger

This market remains confined to a very intense downtrend, with the price most recently breaking to a fresh record low by 0.8275 ahead of the latest minor bounce. However, a bullish weekly formation in late June could suggest that at a minimum, there is some form of a medium-term base in place by 0.8275 ahead of some corrective gains back towards the 0.9000-0.9500 area. Back below 0.8275 negates recovery outlook.

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)

16

19

(3)

Bearish

Yield in 1 Year(Percent)

0.41

0.24

0.17

Bullish

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_Picture_6.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

US Dollar / Swiss Franc Interest Rate Trading Bias: Neutral

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. This will remain the case as Portugal, Italy, Ireland, Greece, and Spain government bond yields continue to trade at euro era highs relative to benchmark German bunds.

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Bias: Neutral

USDCHF_US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_06072011_CHF.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

The Franc is second only to the Australian Dollar in terms of its overvaluation vis-à-vis the US Dollar, with USDCHF trading 31.1 percent below its PPP implied exchange rate. Interestingly, the historically iron-clad correlation between the Franc and the Euro has withered to insignificant levels while the link between USDCHF and EURCHF has soared, hinting much of the Swiss currency’s relentless advance owes to its role as a regional European safe haven against a backdrop of lingering sovereign stress in the Euro Zone. With that in mind, while the purely valuation-based implications of current positioning argue for a reversal, the lingering troubles in the currency bloc suggest that the current disparity is likely to get worse before it gets better.

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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