Fundamental Outlook for Swiss Franc: Bullish

- Swiss National Bank said last week that it may buy Euros to weaken Swiss Franc
- On a shorter-term basis, speculative sentiment suggests Swissie could rally further against US dollar
- Forex futures positioning nonetheless shows risks of longer-term USD/CHF bottom

The Swiss Franc rallied against the US dollar and Japanese yen last week, pushing USD/CHF below key trendline support to 4-month lows. Meanwhile, the Swissie fell slightly versus the euro, but the moves ultimately left EUR/CHF within a one-month range. All told, the currency’s steep rally against the dollar and yen, and minimal depreciation against the euro suggests that the Swiss National Bank’s verbal intervention efforts from the previous week were ineffective. Indeed, 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, and since the Euro-zone is Switzerland’s biggest trading partner, the central bank is devoted to focusing on EUR/CHF in particular.

The week ahead promises comparatively little in foreseeable event risk, though the release of the Swiss trade balance and the KOF leading indicator should give a decent reflection on how the economy is faring. The Swiss trade balance has managed to remain in positive territory consistently since August 2005, but exports have contracted for the past two months as growth throughout Europe slow. However, an increase in the month of April would suggest that the regions’ recessions bottomed in Q1. Meanwhile, the KOF leading indicator is projected to improve for the first time since June 2007 to -1.78 in May from its record low of -1.86. Though not a market-mover, an increase would add to evidence that the worst has past for the Swiss economy.

Not to be forgotten, we must keep an eye out for SNB intervention, most likely verbal, less likely physical. 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. As Quantitative Strategist David Rodriguez noted last week, "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.