No change since last month: The USDCHF is in the exact same position as the EURUSD (but as the inverse). The USDCHF is lagging the EURUSD a bit though as the pair just broke above its long term trendline (resistance in this case). The long term target is now above 1.8309. The Daily Technicals will focus on short term pattern development.
US Dollar/Swiss Franc exchange rate forecasts remain largely immune to interest rate developments, and we see that the USD/CHF continues to rally despite significant shifts in rate forecasts for the Swiss Franc. Swiss National Bank officials surprised many when they slashed interest rates by 100 basis points, and markets understandably pulled back expectations of further interest rate decreases. Markets have likewise priced in lower US interest rates through the same period, and we would typically see the Swiss Franc recover against the US Dollar in such circumstances. Yet that has hardly been the case as of late, and the CHF continues to tumble despite a relatively neutral outlook for the future of US Dollar-Swiss Franc yield differentials.
It seems increasingly likely that the US Dollar/Swiss Franc pair will move largely independently of interest rate changes, and it is difficult to predict how the currency pair may react to shifts in rate forecasts.
USDCHF Valuation Forecast: Bullish
The Swiss Franc is the most overvalued currency against the US dollar by a wide margin. The pair also did comparatively poorly against the greenback last month, losing 2.21%. With both value and momentum firmly pointing to USDCHF upside, the yield aspect seems to come in neutral with traders pricing in no net change in interest rates for the SNB or the Federal Reserve over the next 12 months. Still, it must be kept in mind that the SNB has already surprised twice with substantial cuts and has scope to continue cutting for longer than the Fed. With all of these considerations in mind, a long USDCHF position seems most desirable from a valuation standpoint this month.
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 overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.