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Our EUR/CHF forecast for the end of Q2 is 1.25. We expect further appreciation with the EUR trading at 1.27 and 1.30 in Q3 and at the year end , respectively.
This outlook relies predominantly on the fact that we see the EUR/USD rising to 1.42 by the end of the next 12-month period. The main reason behind that is the fact that the European sovereign debt crisis is calming down. Therefore, there has been an upside room for the Euro and mainly downside for the Dollar. We still are focusing on what is currently happening in the US, and how significant the debt problems of the US are, as well as we are closely looking at Spain right now. As currently there is no problem with EUR/USD; consequently the EUR/CHF is stable. Our outlook for the Swiss economy is quite optimistic.
Mainly there is a Euro-driven upside for the EUR/CHF.
I do not see any significant changes in the policy of the SNB with the recent appointment of the new president Thomas Jordan. I believe the officials are taking a very firm stand and they manage to hold it, although there is an upset coupled with that. I think for the time being there is no reason for them to change their policy, because as there are so many crises around the world (look at the EU and the US, which is in trouble as well) , the Swiss Franc is going to be a target for the safe haven and that is going to lead to appreciation. There is no sense to abandon what the SNB is doing now, unless the policy makers are totally sure they can accept a significantly stronger currency. Therefore, the ideal thing for the SNB, I think, is to stick to the policy until times comes when they feel the upside pressure on the currency would not so big any more if they released their target. Personally, I do not see that happening for quite some time.
There are all kinds of ways to determine the fair value for the Swiss Franc, but I do not really believe in them. According to Purchasing Power Parity, the Swiss Franc is overvalued at this point, thus the EUR/CHF is undervalued by 12 %. The pair theoretically should be higher. Ultimately, in terms of the economy it does not really matter what the nominal value of the currency is. It is always the question where it comes from. The EUR/CHF could trade at 1.10 and it would be fine; if it boosts for quite a while, it would inevitably come down if the economy does not support it. The problem is always the record adjustment in the wrong direction for the economy. That is what should be prevented. The appreciation of the currency per se is not a problem even if the export sector does not have enough time to adjust to a new value of the currency.
Right now the Swiss Franc is definitely overvalued.