Swiss Franc Trading Hinges on Broad Risk, US Dollar Outlook

Swiss Franc Trading Hinges on Broad Risk, US Dollar Outlook

Fundamental Forecast for Swiss Franc: Bearish

- Swiss Retail Sales Unexpectedly Fell in August
- ZEW Survey Shows Investor Confidence at Record High
- Speculative Sentiment Hints Swiss Franc Rally to Continue

The Swiss Franc sees little currency-specific event risk in the week ahead, with price action likely to fall in with broad trends in financial markets’ sentiment and the US Dollar. The Franc has trended firmly higher against the US Dollar since March, undeterred by continuing deflation, rising unemployment, sluggish demand in key export markets, and active central bank intervention against the currency. The catalyst for these gains would not be found with the mountain nation as the buck slumped on the back of the broad rally in risk appetite, slipping nearly 16% against the Swiss unit.

A pivotal moment in this rally may now be upon us. Last Friday’s sharp decline across the spectrum of risk correlated assets on the back of disappointing earnings from Bank of America (BofA) and lower than expected revenues from General Electric (GE) was quite telling: the BofA has long been seen as a relatively weaker link amid the big US financial firms, so the result was not so terrible for the sector as a whole considering much better outcomes from other leading names earlier in the week; meanwhile, the GE report offered few surprises and beat expectations on the actual earnings portion of the report. All in all, it seems the instant, violent selloff that ensued reflected a market that was looking for an excuse to dump risky assets as recent gains increasingly look overextended. Indeed, equities have jumped to the highest levels since 2003 relative to earnings, which seems more than a little overdone in a year when the world economy is set to see the first contraction in global output since the Second World War. If bullish momentum has in fact been exhausted, a deep correction lies ahead which will put firm upward pressure on the US Dollar at the expense of most of its major counterparts, including the Swiss Franc.

Turning to the economic calendar, September’s Trade Balance report is the only item of interest on the docket. Traders will be looking for clues that the central bank’s deflation-minded policy of keeping a lid on the value of the Franc, particularly against that of the Euro, is having any positive spillover on the external sector. Over 60% of all Swiss exports find demand in Euro Zone markets. - IS