Swiss Franc / US Dollar Monthly Technical Forecast

Has extended declines in 2009 to fresh lows by 1.0185 thus far ahead of the latest minor bounce. Despite the downtrend, we contend that the market is in the process of attempting to carve out a higher low above the multi-year lows below parity, ahead of some fresh upside back above 1.1000 over the medium to longer-term. Although the 78.6% fib retrace off of the major 2008-2009 move has been slightly breached, the 1.0200 area could be an ideal spot for the higher low to take form. In ability to hold above 1.0200 on a weekly close basis will however negate recovery prospects and expose a drop below parity.

Swiss Franc / US Dollar Interest Rate Forecast

The US Dollar/Swiss Franc for a second month saw a significant decline in yield differential as the Swiss economy shows signs of emerging from its recession. Overnight index swaps are now pricing in 40 bps of rate hikes over the next twelve months which is more than double last month’s 18 bps. This has lowered the spread to 34 from 62 bps bringing interest rate expectations in line with recent price action. What makes the move impressive is that the Swiss National Bank like the BoJ traditionally keeps its rates low.

Additionally, the SNB has concerns over deflation risks which were reinforced by the recent CPI report showing prices declined for a seventh straight month. Policy makers have maintained their commitment to intervene in the currency market if the Franc’s appreciation reaches levels that would threaten a recovery. The USDCHF has continued to make fresh yearly lows which could inspire futures actions from the central bank.
 

Swiss Dollar / US Dollar Valuation Forecast

The disparity between fair value and spot has continued to widen, with the Franc now trading at premium of over 2600 pips above its PPP-implied exchange rate to the US Dollar. As with the Euro, however, momentum seems to be against the greenback after slipping steadily lower throughout the third quarter. The rates outlook is far more forgiving, and the constant specter of SNB intervention is unlikely to let the Franc get too far ahead of itself, but the -99% inverse correlation between USDCHF and EURUSD cannot be ignored, and the possibility of Euro strength could certainly delay (if not necessarily negate) any meaningful correction 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.