chf fundamentals

Swiss Franc to Weaken Further as Risks for Deflation Intensify

Friday, 27 March 2009 21:20:50 GMT  |  David Song, Currency Analyst

Swiss Franc to Weaken Further as Risks for Deflation Intensify

Fundamental Outlook for Swiss Franc: Bearish

- Swiss Leading Indicator Falls to Record low
- CHF/JPY Marks ‘Outside Day’

As the economic calendar for the following week is expected to reinforce a weakening outlook for growth and inflation in Switzerland, deteriorating fundamentals paired with the Swiss National Bank’s commitment to prevent further appreciation in the franc is likely to weigh on the exchange rate going forward. Looking ahead, the annual rate of inflation is anticipated to hold flat in March as prices pressures deteriorate at a rapid pace, and mounting risks for deflation is likely to instill a dour outlook for the export-driven economy as the region faces its worse economic downturn in over a quarter century. Nevertheless, as risk trends continue to dictate price action in the currency market, increased demands for higher-yielding assets would drive the swissie lower as investors seek higher risk/reward investments. 

SNB Governor Jean-Pierre Roth said that he expects the economy to stagnate in 2010 during a speech earlier this week, while he forecasts the annual growth rate to fall between 2.5-3.0% in 2009, and went onto say that the board will ‘do what’s necessary’ to limit the downside risks for price growth as they expect inflation to hold close to zero over the next two-years. The central bank head claimed that ‘the best way to prevent deflation is to block the exchange rate,’ and the comments suggests that the SNB will take additional steps to shore up the economy as growth and inflation falter.

Meanwhile, SNB board member, Thomas Jordan, said that the nation is currently ‘facing a severe recession,’ and argued that ‘unconventional’ actions must be taken as the global economic downturn intensifies. Mr. Jordan added that the central bank will increase the month supply ‘as strongly as is needed’ as the central bank maintains a 2% target for price growth, and concluded that further appreciating on the Swiss franc would pose a grave threaten to long-term stability. As policy makers pledge to employ all of their available tools to avoid further appreciation in the domestic currency, the USD/CHF is likely to push higher over the following week, and traders may target the 100-Day SMA at 1.1525. - DS

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