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    USD/CHF: reaching parity depends on the Euro

    This spring I repeatedly wrote about the prospects of long positions in the USD/ CHF pair and predicted its return above parity.

    Му expectations…

    My forecast was based on following considerations. The Fed’s and the SNB (Swiss National Bank) monetary policies this year were diametrically opposed to each other: the Fed plans to continue raising rates, while the SNB transferred them into the negative territory. The euro’s weakening as a result of quantitative easing in the euro area will be helpful too, as the euro and the franc to behave similarly in relation to the US dollar. This will create a fundamental basis for the dollar’s growth against the franc. Any attempt of the Swiss franc to strengthen will meet tough resistance (intervention) from the local central bank, which is very interested in the currency’s weakening to stimulate inflation and support export-oriented national economy. In addition, seeing dynamic recovery of the US economy and gradual acceleration of global economic growth, investors will be showing more interest for risky-assets, and the demand for “safe havens” such as the franc should decrease. These were my expectations …

    And they seem logical. I was right about the SNB’s readiness for interventions. In June, the central bank resorted to this measure, warning that there was a possibility of another intervention in the event of an undesirable strengthening of the national currency’s exchange rate.

    …and reality

    Despite the interventions, it’s been weeks, even months, and there are no signal in favor of my forecast. On the contrary – in April the pair declined and since then it only made few attempts to reach level 0.95, although all of them failed.

    A number of factors were supportive of the Franc. The main ones are: April recovery from the lows and consolidation of the EUR/USD pair, which is in opposite correlation with the USD/CHF, as well as demand for the Swiss franc as a safe-haven asset on the back of Greek crisis.

    In addition, the desire to bet against the Swiss franc, may have declined after the release of inflation data for the month of June, which reflected unexpected recovery of the Swiss CPI index from post-crisis low of -1.2% y/y to -1.0% y / y. Some market participants apparently decided that inflation has already reached its “bottom” and begins to accelerate, reflecting business activity growth in the economy. Of course, these positive expectations may be premature – judging by the euro area, a brief surge in prices may be followed by another weakening. But nonetheless…

    Revision

    We have to admit that the Swiss franc’s weakening against the US dollar is now complicated. Even if we hope for a speedy resolution of Greek crisis, we already have a new reason to worry about – the collapse of Chinese stock market, which may affect not only the real sector of China’s economy (by the way, in June, China registered its first drop in car sales in two years),  but even remote corners of the world – after all, we are talking about a crisis in the second largest world’s economic system. And in case of a crisis situation, the demand for the Swiss franc will be great, obviously.

    We shouldn’t overestimate SNB powers regarding weakening of the national currency. The SNB rates are negative already, and there’s almost no room for another lowering – except for just a little bit. And interventions are not omnipotent – there are plenty of examples when massive interventions failed to hold back market’s crowd. By the way, the Swiss central bank itself has recently suffered a defeat when using interventions to keep the EUR/CHF above 1.2, in the end it had to give up and allow the pair’s decline.

    Analysts closely watching the SNB said that the central bank now has a new (albeit unofficial) minimum level for the EUR / CHF – 1.03. While the Swiss regulator manages to defend it through intervention (I think it will keep doing so in the foreseeable future), but it still fails to significantly push the pair from this level. It will be possible only in case of risk appetite growth among the investors.

    Conclusion

    In present conditions, the USD/CHF growth to parity levels is only possible in case of the EUR/USD decline. If my forecast expecting the Euro to fall into $1.04 amid the rate hike in the US comes true, even if the EUR/CHF remains within the 1.03-1.05 range, the USD/CHF will find itself within 0.99-1.01:

    (EUR/CHF) / (EUR/USD) = USD/CHF

    1.03/1.04 = 0.99

    1.05/1.04 = 1.01.

    Thus, the possibility that the USD / CHF reaches its parity this year is still relevant, but it depends on the euro’s decline against the dollar. I think it’s going to happen, and we will see the dollar/franc if not at parity, then somewhere very close to it.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

    This spring I repeatedly wrote about the prospects of long positions in the USD/ CHF pair and predicted its return above parity.

    Му expectations…

    My forecast was based on following considerations. The Fed’s and the SNB (Swiss National Bank) monetary policies this year were diametrically opposed to each other: the Fed plans to continue raising rates, while the SNB transferred them into the negative territory. The euro’s weakening as a result of quantitative easing in the euro area will be helpful too, as the euro and the franc to behave similarly in relation to the US dollar. This will create a fundamental basis for the dollar’s growth against the franc. Any attempt of the Swiss franc to strengthen will meet tough resistance (intervention) from the local central bank, which is very interested in the currency’s weakening to stimulate inflation and support export-oriented national economy. In addition, seeing dynamic recovery of the US economy and gradual acceleration of global economic growth, investors will be showing more interest for risky-assets, and the demand for “safe havens” such as the franc should decrease. These were my expectations …

    And they seem logical. I was right about the SNB’s readiness for interventions. In June, the central bank resorted to this measure, warning that there was a possibility of another intervention in the event of an undesirable strengthening of the national currency’s exchange rate.

    …and reality

    Despite the interventions, it’s been weeks, even months, and there are no signal in favor of my forecast. On the contrary – in April the pair declined and since then it only made few attempts to reach level 0.95, although all of them failed.

    A number of factors were supportive of the Franc. The main ones are: April recovery from the lows and consolidation of the EUR/USD pair, which is in opposite correlation with the USD/CHF, as well as demand for the Swiss franc as a safe-haven asset on the back of Greek crisis.

    In addition, the desire to bet against the Swiss franc, may have declined after the release of inflation data for the month of June, which reflected unexpected recovery of the Swiss CPI index from post-crisis low of -1.2% y/y to -1.0% y / y. Some market participants apparently decided that inflation has already reached its “bottom” and begins to accelerate, reflecting business activity growth in the economy. Of course, these positive expectations may be premature – judging by the euro area, a brief surge in prices may be followed by another weakening. But nonetheless…

    Revision

    We have to admit that the Swiss franc’s weakening against the US dollar is now complicated. Even if we hope for a speedy resolution of Greek crisis, we already have a new reason to worry about – the collapse of Chinese stock market, which may affect not only the real sector of China’s economy (by the way, in June, China registered its first drop in car sales in two years),  but even remote corners of the world – after all, we are talking about a crisis in the second largest world’s economic system. And in case of a crisis situation, the demand for the Swiss franc will be great, obviously.

    We shouldn’t overestimate SNB powers regarding weakening of the national currency. The SNB rates are negative already, and there’s almost no room for another lowering – except for just a little bit. And interventions are not omnipotent – there are plenty of examples when massive interventions failed to hold back market’s crowd. By the way, the Swiss central bank itself has recently suffered a defeat when using interventions to keep the EUR/CHF above 1.2, in the end it had to give up and allow the pair’s decline.

    Analysts closely watching the SNB said that the central bank now has a new (albeit unofficial) minimum level for the EUR / CHF – 1.03. While the Swiss regulator manages to defend it through intervention (I think it will keep doing so in the foreseeable future), but it still fails to significantly push the pair from this level. It will be possible only in case of risk appetite growth among the investors.

    Conclusion

    In present conditions, the USD/CHF growth to parity levels is only possible in case of the EUR/USD decline. If my forecast expecting the Euro to fall into $1.04 amid the rate hike in the US comes true, even if the EUR/CHF remains within the 1.03-1.05 range, the USD/CHF will find itself within 0.99-1.01:

    (EUR/CHF) / (EUR/USD) = USD/CHF

    1.03/1.04 = 0.99

    1.05/1.04 = 1.01.

    Thus, the possibility that the USD / CHF reaches its parity this year is still relevant, but it depends on the euro’s decline against the dollar. I think it’s going to happen, and we will see the dollar/franc if not at parity, then somewhere very close to it.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!


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