[B]US Dollar / Swiss Franc Monthly Technical Forecast[/B]
The USDCHF count is the same as the EURUSD count (but as the inverse). There are 2 competing counts, one that calls for formation of a low prior to 1.0367 and one that gives scope to a drop below 1.0367 before a bottom and reversal (100.37, where wave c and a would be equal, is support in the second scenario). In the case of the latter, the current decline would be wave 3 of C and would extend from near current price. Only a rally above 1.0957 would suggest that a low is in place.
[B]US Dollar / Swiss Franc Interest Rate Forecast[/B]
The US Dollar/Swiss Franc currency pair has historically shown relatively little correlation to interest rate differentials, and recent price action has shown no different. The Swiss National Bank has matched its US counterpart in taking interest rates down to zero percent, and it is little surprise to note that movements in yield forecasts have had little effect on the USD/CHF.
Overnight Index Swaps show expectations that Federal Reserve interest rates will grow 0.71 percentage points against their Swiss counterparts in the year ahead. Such an interest rate advantage would arguably boost the USD/CHF currency pair, but it will be far more important to gauge broader US dollar trends. Recent price action has shown the USD/CHF decline when the S&P 500 rallies, and we expect this to continue to be the case through the foreseeable future.
[B]US Dollar / Swiss Franc Valuation Forecast[/B]
[B]USDCHF Valuation Forecast: [/B][B]Bullish[/B]
On balance, the outlook for the Swiss Franc 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, most notably a leg up on fiscal and monetary stimulus. Switzerland’s dependency on external demand as a key driver of economic growth further bolsters the argument that the mountain nation will lag in the recovery. The recent selloff in the Dollar has widened the disparity between spot and the PPP-implied exchange rate, offering bulls an increasingly attractive entry point once growth and yield considerations re-capture traders’ attention.
[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 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.