Fundamental Outlook for Swiss Franc: Bearish

- Switzerland GDP Holds Flat in 3Q
- USD/CHF December Forecast Calls for Bullish Outlook

The Swiss franc strengthened this week to pick up 200+ points against the U.S. dollar amid the dismal GDP release however, investors are likely to turn over their positions next week as the Swiss National Bank is widely expected to lower the 3-month target LIBOR rate by 50bp to 0.50%. The SNB has certainly stepped up their efforts as they lowered the key rate by 175bp over the last two months, and may ease policy further over the coming months as they carry out their dual mandate to ensure price stability and to foster economic growth.

A Bloomberg News survey shows that all of the economists polled anticipate the central bank to lower borrowing costs yet again in order to stave off a deep and prolonged downturn in the economy. Deteriorating fundamentals paired with fading demands from the global economy has certainly dragged on the export-based country as the economy failed to grow in the third quarter, and may face further headwinds over the near-term as its biggest trading partners head into a recession. In addition to the considerable slowdown, the drastic decline in global commodity prices have also raised the risks for deflation as policymakers expect price growth to fall below the 2% target by the end of this year, which could lead the SNB to ease policy further over the coming months as they expects economic activity to contract in 2009. The extraordinary efforts by Governor Roth and his colleagues continues to reflect a dour outlook for Switzerland, and may weigh on the franc going forward as policymakers try to reduce the spillover effects which emerged from the financial crisis. As a result, the Swiss franc may pare gains over the following week, and we may see the USD/CHF continue to move along an upward tend over the near-term as the flight to safety continues.

Jamie Saettele is a Technical Currency Analyst for FXCM.