chf fundamentals

Swiss Franc May Continue to Gain as Confidence Falls on Financial Markets

Saturday, 14 February 2009 00:28:53 GMT  |  Ilya Spivak, Currency Analyst

The Swiss franc was the best-performing major currency last week and is likely to remain well-supported as confidence evaporates across financial markets.

Swiss Franc May Continue to Gain as Confidence Falls on Financial Markets

Fundamental Outlook for Swiss Franc: Bearish

- Swiss Franc Outperforms Other Major Currencies
- Inflation Rate Drops More than Expected, Prints at 0.1%
- Producer and Import Prices Decline for a Sixth Month on Energy Costs
- Consumer Confidence Unexpectedly Improves, But Fails to Impress

The Swiss franc was the best-performing major currency last week and is likely to remain well-supported as confidence evaporates across financial markets. Investors were clearly not comforted by US policymakers’ passage of a gargantuan fiscal stimulus package or Treasury Secretary Tim Geithner’s conspicuously vague proposal to rid financial institutions of mortgage-linked toxic assets: stock prices collapsed and capital fled to stand-by safe haven currencies, boosting the Franc, the US Dollar, and the Japanese Yen. Next week promises a hefty dollop of US event risk, culminating in the always-important Consumer Price Index report on Friday. This coupled with expectations of a plan to deal with mounting home foreclosures from an already humbled Obama administration threatens risky assets and promises a fertile environment for extended Swiss Franc upside.

Looking at the economic calendar, Retail Sales have room for a bit of an improvement: traders saw the SECO measure of consumer confidence rebounded from record lows last week as inflation came to a near-standstill, boosting Swiss consumers’ purchasing power. Importantly, a print in positive territory is unlikely to be anything more a temporary up-tick: unemployment has risen to a 2-year high of 3.3% and will weigh on disposable incomes as well as prompt precautionary saving; further, the fallout in price growth will work against consumption if inflation turns negative (a reasonable proposition considering CPI printed at just 0.1% in January), for if consumers expect prices to fall in the future they will perpetually put off purchases to get the best possible deal, putting the brakes on spending altogether. Indeed, Swiss National Bank Vice-Chairman Philipp Hildebrand has even suggested forex market intervention to check the deflation threat. The Trade Balance may slip into deficit for the first time since August 2005: the surplus narrowed to just 0.22 billion francs in December as outbound shipments plunged 13.3%, the most on record, reflecting deepening recession in Switzerland’s key export markets in the US and Europe. With no noticeable improvement in overseas demand, there seems little scope for trading terms to head anywhere but lower.

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