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USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

2011-10-06 17:53:00
Joel Kruger, Technical Strategist, David Rodriguez, Quantitative Strategist, and Ilya Spivak, Currency Strategist,
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Monthly Chart

US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_EUR10.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

Prepared by Joel Kruger

We have seen a very impressive recovery out from the record lows just shy of 0.7000 over the past several weeks, with the price racing back towards critical psychological barriers at parity. While inter-day studies are looking a little stretched and warranting some corrective selling to allow for some necessary consolidation, we continue to project considerable upside over the medium and longer-term. Look for a break above 0.9500 to accelerate gains towards and through parity from where the next objective will come in by 1.1000. Any setbacks are expected to be well supported above 0.8500.

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)

10

(13)

23

Bullish

Yield in 1 Year(Percent)

0.35

(0.09)

0.44

Bullish

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

Significant Swiss interest rate cuts and aggressive Swiss National Bank rhetoric have forced a noteworthy Swiss Franc pullback (USDCHF bounce). The SNB’s Euro/Swiss Franc exchange rate peg likewise decreased the attractiveness of CHF-long positions, and we see relatively limited scope for a substantial Swiss Franc rally.

Given stagnant interest rate expectations in both the US and Switzerland, we suspect yields will play no real role in USDCHF price action. Traders should instead trade the USDCHF as a pure play on US Dollar strength or weakness.

The substantial USDCHF rally off of the lows shows signs of trend exhaustion, and we hesitate to go long the USDCHF in what could be a bearish month of October for the US currency.

Swiss Franc / US Dollar Valuation Forecast

USDCHF Valuation Forecast: Bullish

US_Dollar_Swiss_Franc_Exchange_Rate_Forecast_body_Picture_7.png, USDCHF: US Dollar Swiss Franc Exchange Rate Forecast

Source: Bloomberg

The SNB’s announcement of a floor on EURCHF weighed heavily on the Franc across its leading pairings, eroding the currency’s appeal as the safe haven. Indeed, one of the two central aspects of a good safety asset is its ability to be a store of value (the other being liquidity), which the Franc fit in spades with Switzerland’s low inflation rate. Needless to say, the SNB action went a long way toward undoing that appeal, opening the door for USDCHF to move higher as capital migrated to the only haven alternative left it the FX space (considering the Yen likewise suffers from an intervention threat). More of the same appears likely going forward.

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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