Fundamental Outlook for Swiss Franc: Bearish

- Sharply lower Swiss Producer and Import Prices Boosts Risks of Intervention
- Swiss National Bank says it may buy Euros to weaken Swiss Franc
- Forex futures positioning nonetheless shows risks of USD/CHF bottom

The Swiss Franc finished the week lower against major forex counterparts, as Swiss National Bank verbal intervention increased fears that the bank would once again intervene in foreign exchange markets. Weak inflation figures prompted officials to claim that they may need to once again buy Euros to offset the risk of deflation. With SNB interest rate targets effectively at zero percent, the bank is exploring various unconventional measures to boost money supply and stave off falling prices. Such behavior is surely to spark the ire of European counterparts and underline the risks of protectionism, but few words from European Central Bank officials suggests there is little viable threat of retaliation. As it stands, forex traders cannot ignore the risks of SNB intervention—particularly as the Euro/Swiss Franc challenges the psychologically significant 1.5000.

The week ahead promises comparatively little in foreseeable event risk, but we must obviously keep an eye out for SNB intervention. Whether or not the Swiss central bank will cause a lasting shift in CHF trends is another matter entirely, however. Looking back to their initial intervention, the SNB sent the EUR/CHF an incredible 500 pips higher in a single trading day. Since then, the currency pair has retraced nearly 50 percent of its initial advance, and it’s no coincidence that the SNB reiterated its determination to keep the Swiss Franc weak. We would argue that the mere prospect of SNB intervention should be enough to keep the USD/CHF and EUR/CHF afloat, but we recognize that FX markets may nonetheless continue to ignore the threat of CHF sell-offs. Perhaps tellingly, over-the-counter FX Options markets show that sentiment and volatility expectations on the EUR/CHF have scarcely shifted following SNB rhetoric. It seems as though traders are calling the central bank’s bluff.

Antonio Sousa is a Currency Analyst for FXCM.