The Swiss franc is likely to face increased selling pressures over the following week as the economic docket is expected to show a deteriorating outlook for growth and inflation, and as the low-yielding currency’s safe-haven status comes under question, the USD/CHF should hold its bullish trend over the near-term as the flight to quality continues.
Swiss Franc To Hold Bearish Trend as Growth and Inflation Falter
Fundamental Outlook for Swiss Franc: Bearish
- UBS Consumption Indicator Falls Further as Households Face Weakening Labor Market
- Swiss Leading Indicator Drops to Record Low, Reinforcing Fears of a Deepening Downturn
The Swiss franc is likely to face increased selling pressures over the following week as the economic docket is expected to show a deteriorating outlook for growth and inflation, and as the low-yielding currency’s safe-haven status comes under question, the USD/CHF should hold its bullish trend over the near-term as the flight to quality continues. As a result, we should see the exchange rate push higher in the week ahead to retrace the sharp sell-off from December, and the dollar-franc may test the 2/20 high of 1.1890 in March as risk trends continue to drive price action in the currency market. Meanwhile, mounting turmoil in the banking industry paired with the instability in the global credit market has stoked pressures for Swiss regulators to increase transparency, which could also weigh on the appeal of the low-yielding currency as the nation’s policy for banking secrecy comes under scrutiny.
Nevertheless, as the GDP reading is expected to show a 0.7% contraction in the fourth quarter, which would be the biggest economic contraction since 1994, the economic outlook for the region remains bleak. In addition, SNB Governing Board member Thomas Jordan said that the economy may contract by more than 1.0% in 2009 as the global economy faces its first recession since World War II, and the comments by Mr. Jordan suggests that the economy is weakening at an even faster pace than the central bank had initially expected as the Euro-Zone, Switzerland’s biggest trading partner, faces a deepening recession. As trade conditions deteriorate, firms are likely to cut production and employment going forward in an effort to reduce costs, which could lead the government to step up their efforts in order to keep the export-driven economy afloat. Moreover, falling commodity prices paired with the economic downturn has certainly tapered the upside risks for inflation, and as price growth is expected to stall in February, policy makers may adopt unconventional measures to maintain their 2% target for price growth as the Swiss National Bank projects the annual rate of inflation to reach 0.9% this year. - DS
