chf fundamentals

Swiss Franc Fundamentals Faltering, But Positioning May Point to Strength

Sunday, 02 November 2008 23:17:49 GMT  |  Ilya Spivak, Currency Analyst

The Swiss Franc will be under pressure next week as economic data continues to weaken, but technical positioning is supportive of near-term strength against the US dollar.

Fundamental Outlook for Swiss Franc: Bearish

- Switzerland's UBS Consumption Index Improves, But Will It Hold?
- KOF Leading Indicator Disappoints, Stoking Increased Growth Fears

The Swiss Franc will be under pressure next week as economic data continues to weaken, but technical positioning is supportive of near-term strength against the US dollar. The SVME-Purchasing Managers Index is expected to show sentiment deteriorate for the sixth consecutive month with a print at 45.5. October’s Consumer Price Index is expected to show the pace of price growth slow to an annualized 2.5%, the lowest since April. As with most inflation readings across the G10, Swiss CPI peaked in July as oil prices reached above $147/barrel and began easing when the crude rally faltered and changed direction. Still, trading in overnight index swaps suggests the markets are betting on inaction from the Swiss National Bank at the next meeting on November 12th. Unemployment figures round out the week, with the jobless rate expected to tick up to 2.5% in October. Unemployment bottomed at a 6-year low in June and has since started moving in the opposite direction as Swiss companies cut back in response to slowing global demand (particularly from the EU, which accounts for 60% of Switzerland’s exports).

Technical positioning looks supportive of Franc strength against the US dollar in the near to medium term. USDCHF price action has consolidated in a Rising Wedge formation since early September, with confirmation offered by negative divergence with the Relative Strength Index (RSI) oscillator. This hints the likelihood of a bearish breakout following another test of resistance near the 1.17 level. Still, we would see any such move as a counter-trend correction: the yield gap between the Swiss Franc and the US dollar is expected widen by at least 50 basis points over the next 12 months, pointing to a bullish long-term bias for USDCHF. – IS

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