USDCHF Forecasts for March

USDCHF Monthly Technical Forecast

A fresh higher low is now sought out above the 0.9635 March 2008 historic lows at 1.0370 (December 2008 lows), to be confirmed on a break back above the 2008 highs from November 2008 at 1.2300. The 50-Month SMA by 1.1900 had managed to cap rallies in February, but we look for this level to be overcome in March to open a direct retest of 1.2300. Above 1.2300 exposes 1.2775 (October 2006 highs) and then the 2005 highs by 1.3290 further up. The 10-Month SMA has crossed back up through the 20-Month to provided added confirmation for bullish bias. Ultimately, only back under 1.1000 gives reason for concern.

USDCHF Fundamental Outlook/Interest Rate Forecast

The US Federal Reserve and Swiss National Bank have maintained their interest rates near zero which has negated their impact on currency price action. Historically the interest rate spread hasn’t been a significant factor in valuation for the pair as risk sentiment has had the biggest influence. However, that correlation has disappeared as the dollar has replaced the Franc and the Yen as the main beneficiary of safe-haven flows.

According to Overnight Index Swaps, the differential in interest rate expectations favor the dollar by 51 bps, as the Fed funds rate are projected to increase by 41 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 as the Franc becomes more susceptible to fundamental factors.

Swiss Franc – US Dollar Valuation Forecast

The Swiss Franc value gap against the U.S. dollar dropped considerably during the month, giving up its spot as most overvalued currency against the greenback. Increased turmoil in the banking sector paired with mounting growth concerns has certainly put the Franc’s safe-haven status under question, much like the yen, but unlike its Japanese counterpart, the low-yielding currency posted a modest loss of 0.66% against the reserve currency during the month. However, as the flight to safety continues, the exchange rate is likely to weaken further as the economic downturn in the region intensifies, and should continue to correct the imbalance between the implied and the current spot rate.

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.

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