Fundamental Outlook for Swiss Franc: Bearish

- Producer and Import Prices See Largest Drop in Over 30 Years
- Retail Sales Unexpectedly Rise 2.9% in October

Switzerland’s economic calendar is empty next week, leaving the Franc in search of other catalysts to guide directional momentum. Having trended lower against the US dollar since mid-July, the currency has reversed course to register impressive gains, adding over 8% last week alone and pushing USD/CHF to test support at September’s swing low near 1.0690. That said, our Speculative Sentiment Index suggests open interest fell by over 30% from the end of November into the first week of this month, alluding to illiquid markets prone to knee-jerk volatility. This puts the significance of the latest down move into question, for even though the market appears to be pricing in a considerably stronger Swiss Franc there are far fewer traders behind the move than at the last major turning point in the trend.

Given our skepticism of how representative current price action is of the broad market sentiment towards USD/CHF, we take a step back to revisit overall positioning. Looking at relative purchasing power as a guide to currency valuation, we see that the “fair” USD/CHF exchange rate is near 1.65, suggesting the Franc is overvalued by over 5000 pips. The yield outlook is also bullish for the pair, with overnight index swaps pointing to at least 50 basis points in rate hikes over the next 12 months for the US Fed and no change in borrowing costs for the SNB. Technically, we’ve seen the aforementioned 1.0690 level form into a double bottom and showing a very large Hammer with bullish confirmation.

On balance, it seems the medium-term outlook favors Swiss Franc weakness. Price action may become muted next week as the onset of the Christmas holiday turns traders’ attention elsewhere. Liquidity is sure to remain low, so relatively small positions may be able to push USD/CHF around to make for erratic price action as December ends. That said, indications point to a strong start for the greenback once volume returns in force after the New Year.

Jamie Saettele is a Technical Currency Analyst for FXCM.