Fundamental Outlook for Swiss Franc: Bearish

- Swiss retail sales increased more than expected in September, jumping to 6.4% from 0.0% the month prior.
- The Swiss trade balance widened to 1.84 billion from 1.46 billion as a 5.5% drop in imports offset a 4.6% decline in exports.
- The Swiss National Bank surprised markets with a 100 bps rate cut bringing their target to 1.00%.

The Swiss National Bank surprised markets with a 100 bps reduction in its benchmark interest rate as the economic growth outlook for the country worsened. The export driven economy saw demand for its goods fall 4.6% in September and with the credit crisis reaching heightened levels in October global demand is expected to fall further. Declining global growth has sunk commodity prices which has the central bank fearful that consumer prices would fall below their 2% target and put the economy at risk of deflation. The surprise rate cut would send the Swiss Franc in a free fall as the USD/CHF would break psychological resistance at 1.200 and reach above the 1.2200 price level.

The Swiss economic calendar for the week is filled with significant indicators, but they may have been overshadowed by the surprise rate cut by the SNB. The UBS consumption indicator unexpectedly rose in September which coordinated with the surprising 6.4% increase in retail sales. However, consumers are expected to have retrenched globally in October and this could lead to the a drop in Swiss consumption. The falling demand for Swiss exports has started to lead companies to cut payroll in order to reduce expenses. Economist are expecting the employment level to slow to 1.9% which would be the lowest since September, 2006. The most significant gauge for the week may be the KOF Swiss leading indicator which is expected to fall to 0.20 from 0.35 which would be the lowest level in five years. The Swiss economy is deteriorating an accelerated pace as its main trading partners find themselves in a recession. The Swiss Franc which in the past has benefited from risk aversion flows has seen that correlation diminish leaving the currency to trade on fundamentals at the mercy of dollar sentiment which is being driven by safe haven flows. Therefore, we could see further weakness going forward with the June, 2007 high of 1.2468 as the next level of resistance as Swiss fundamentals are expected to deteriorate and risk aversion flows to continue. Yet, the sharp rise of the pair could leave it susceptible to a retrace with 1.1883 the 38.2% Fibo extension of the 1.1203- 1.2301 move as a possible support level.

Jamie Saettele is a Technical Currency Analyst for FXCM.