USDCHF Monthly Technical Forecast
A 5 wave advance from .9634 is viewed as the first bull leg in a multi-year uptrend. Like the EURUSD, USD strength has unfolded as a series of 1st and 2nd waves. Staying above 1.1157 keeps short term bullish prospects bright. A drop under there exposes Fibonacci support at 1.0925.
USDCHF Fundamental Outlook/Interest Rate Forecast
As the dollar continues to maintain its strong correlation with risk aversion the price action of the USD/CHF has become less predictable. Historically the interest rate spread hasn’t been a significant factor in valuation for the pair as risk sentiment has had the biggest influence. Therefore, with both US dollar and the Swiss Franc interests rates near zero we don’t expect that relationship to change.
According to Overnight Index Swaps, the differential in interest rate expectations favor the dollar by 45 bps, as the Fed funds rate is projected to increase by 35 bps while the SNB is predicted to lower rates by 10 bps in the next twelve months. The differential promotes a bullish bias for the USD/CHF which could be the case if the Franc becomes more susceptible to fundamental factors now that its has lost its correlation to risk trends.
Swiss Franc – US Dollar Valuation Forecast
On balance, the Swiss Franc’s position is much the same as that of the Euro: the currency’s substantial overvaluation against the US Dollar bolsters other catalysts working in the greenback’s favor, including a leg up on fiscal and monetary stimulus as well as continued risk aversion. While the Franc has undoubtedly sold off over recent months, the valuation outlook suggests that ample room remains for USDCHF upside.
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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in RED, while those that are overvalued are denoted in GREEN.
