chf fundamentals

Swiss Franc Pressured at Key Support, Risk Trends Still in Focus

Saturday, 13 December 2008 01:46:55 GMT  |  Ilya Spivak, Currency Analyst

On balance, the data docket is unlikely to stir meaningful volatility in the Franc exchange rate, with markets already betting that Switzerland will follow the lead of other European nations into a protracted downturn. Indeed, last week saw the Swiss National Bank cut interest rates by another 0.50% on expectations that the economy will shrink in 2009 and 2010 (-0.5% and -1.0% respectively). Risk trends and technical considerations are far more central to shaping near-term price action.

Swiss Franc Pressured at Key Support, Risk Trends Still in Focus

Fundamental Outlook for Swiss Franc: Bearish

- Swiss Jobless Rate Increases to 2.7%, the highest in 9 months
- Investor Confidence Improves as SNB Steps Up Efforts to Support Growth
- Swiss National Bank Cuts Rates 0.50%, Cuts GDP Forecasts

On balance, the data docket is unlikely to stir meaningful volatility in the Franc exchange rate, with markets already betting that Switzerland will follow the lead of other European nations into a protracted downturn. Indeed, last week saw the Swiss National Bank cut interest rates by another 0.50% on expectations that the economy will shrink in 2009 and 2010 (-0.5% and -1.0% respectively). Risk trends and technical considerations are far more central to shaping near-term price action. We suggested last week that safe-haven assets (most notably the US Dollar) may retrace recent strength as seasonal capital flows grip the forex market. As it stands, the greenback sold off sharper than we thought, giving back in a single day what we expected to be spread out over much of December. From a technical perspective, USDCHF is now positioned squarely above a key supporting trend line connecting the lows from late September. Some stalling as traders head off for the holidays notwithstanding, a bounce looks plausible as the dominant bullish trend resumes momentum.

A casual glance at upcoming event risk suggests the dour tilt in economic data is set to continue. It is doubtful that November’s trade figures will be encouraging as global slowdown trims demand for Swiss goods. The mountain nation relies heavily on exports, with overseas shipments amounting to a whopping 59% of overall gross domestic product. Swiss exporters count on the US, UK and the top three Euro Zone economies for over half of their demand. Deteriorating conditions across these markets mean cross-border sales growth is likely to continue to trend lower, eating away at the trade surplus. Retail sales are seen adding a meager 2.0% in the year to October, down sharply from the 6.4% registered in the preceding month. Consumer confidence fell to the lowest level in 5 years in the same period, bolstering the downside scenario. Industrial Production is to slow to the worst in over 2 years in the year to the third quarter for a print at 3.6%. The reading intimately tied to the aforementioned weakness in overseas demand considering machinery, chemicals and metals are Switzerland’s top export commodities. Rounding out the week, Producer Prices are seen losing -0.5% in November, with the annualized growth rate down to the lowest since 2006 at 2%. - IS

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