[B][B]Swiss Franc / US Dollar Monthly Technical Forecast[/B][/B]
As the inverse of the EURUSD, the USDCHF may have found a bottom. Wave C of and A-B-C correction has channeled beautifully and a break above the channel would scream reversal and set in motion the long term USD bull.
The US Dollar/Swiss Franc saw a significant decline in yield differential to 62 from 103 as the outlook for the Swiss economy has improved with global demand showing a pulse. Indeed, the Overnight Index Swaps reversed from a negative 10 bps interest rate outlook for the SNB to a positive 18 bps. However, the central bank traditionally maintains interest rates at a low level in order to inspire demand for Swiss exports which limits the impact of expectations.
The Swiss National Bank continues to look to depreciate its currency and has used verbal intervention to keep Franc bulls in check. Traditionally we have seen little more than lip service from policy makers but this time their words have more teeth following their recent physical intervention. This has led to waning conviction from USDCHF bears near the 1.5500 level as expectations are that the central bank will defend 1.5000.
[B][B]Euro / US Dollar Valuation Forecast[/B][/B]
[B]EURUSD Valuation Forecast: Bearish[/B]
Unlike the Euro, the Swiss Franc has actually become more overvalued against the US Dollar over the past month, bolstering other catalysts working in the greenback’s favor. Most notably, the Swiss National Bank has committed to keep a lid on the currency’s appreciation as a bulwark against the onset of deflation. It is much easier for a country to weaken its currency than to strengthen it because policymakers can simply print more, suggesting the SNB will not have a hard time intervening in currency markets if the Swissie should see considerable appreciation. Further, Switzerland’s dependency on external demand (particularly from the EU) as a key driver of economic growth suggests a recovery for the mountain nation is contingent on a return to growth in other countries, which all but assures that interest rates will be slower to rise there than in the States. A turn away from risk appetite may prove to be the catalyst that sparks a USDCHF correction higher as traders once again turn the greenback as the stand-by safe haven bid.
[B]What is Purchasing Power Parity?[/B]
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.