Swiss Franc To Weaken On Speculation Of Fixed Exchange Rates

Swiss Franc To Weaken On Speculation Of Fixed Exchange Rates

Fundamental Outlook for Swiss Franc: Bearish

- Swiss Retail Sales Slips 1.4% on Growth Concerns
- Risk Aversion on The Rise , Carry Trades Fall to Six-Year Low

The Swiss franc weakened further against the U.S. dollar as the reserve currency continues to reap the benefits from safe haven flows, and is likely to hold its bearish trend against the greenback as risk sentiment continues to drive price action in the forex market. Furthermore, the low-yielding currency pared gains against the euro this week as SNB Vice-President Philipp Hildebrand discussed the possibility of intervening in the currency market, and the EUR/CHF may weaken further over the coming week as policy makers strive to prevent a ‘renewed appreciation’ in the exchange rate. Meanwhile, the GBP/CHF dropped nearly 600+pips over the week to retrace the sharp rally from earlier this month, and the pair is likely to hold its downward trend over the near-term as investors continue to curb their appetite for risky assets.

The USD/CHF crossed above the 50-Day and 100-Day SMA for the first time since July, and may continue to retrace the sharp selloff in December on the back of U.S. dollar strength. With short-term support firmly holding at 1.1100 (38.2% Fib), we may see the pair continue to rise over the following week to test 1.1800 for psychological resistance, and a break above this level could push the dollar-franc towards the November high of 1.2300 in the weeks ahead. On the other hand, the Swiss franc is expected to hold its bullish trend against its European counterparts over the near-term as investors remain risk adverse, and the EUR/CHF and the GBP/CHF could fall back towards the December lows as the lower-yielding currency continues to benefit from its safe haven status. However, as the SNB adopts a zero-interest rate policy, increased expectations for fixed exchange rates could drag on the franc, which could leave the pairs range bound over the following week of trading.

Nevertheless, fading demands from home and abroad has certainly taken a toll on the export-driven economy, and the fundamental outlook supports a bearish forecast for the regions currency as the UBS Consumption index and the KOF Leading indicator are expected to weaken further. Retail spending in Switzerland fell for the first time in eight months, and the downturn in private demands are likely to weigh on the consumption outlook as the SNB expects the annual rate of growth to contract 0.5%-1.0% in 2009. Moreover, the Swiss leading indicator is expected to fall to a record low of -0.50 from -0.39 in December, and the dour outlook for growth could stoke increased selling pressures for the franc as the economy faces a recession for the first time in over a decade. - DS

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