Fundamental Forecast for Swiss Franc: Bearish

- Swiss Trade Surplus Narrows as Exports Fall
- SNB Intervention Pushes Franc Sharply Lower Against the Euro

The Swiss franc looks vulnerable in the week ahead as June’s headline inflation data threatens to embolden the central bank’s efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, marking the fourth consecutive month in negative territory and the largest decline since in at least 33 years. The statement issued by the Swiss National Bank following their quarterly policy meeting in June said that the risk of deflation “remains a concern” and reiterated their aim to continue driving long-term borrowing costs lower by buying local currency-denominated bonds and committed to “take firm action to prevent an appreciation of the Swiss franc against the euro.” At this point, the SNB expects inflation to shrink -0.5% on average over 2009 and rebound to add 0.4% next year. The International Monetary Fund (IMF) seems to disagree, however, calling for CPI to fall -0.6% this year and -0.3% in 2010. A downside surprise in June’s report could open the door for traders to punish the Franc as they price in a likelihood that the SNB’s outlook will prove too rosy, requiring the bank to step into the forex market at an accelerated pace to drive down the CHF exchange rate. The possibility of such an outcome seems reasonable considering the leading Producer and Import Prices reading fell by a greater-than-expected -5.0% in May, topping forecasts for a -4.7% decline.

Elsewhere on the economic calendar, the UBS Consumption Indicator that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 4-year low in May as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.5% in the same period for the first time since March 2006. Meanwhile, the SVME-PMI measure of manufacturing-sector sentiment is set to rise to 41.0 in June from 39.8 in the previous month. A reading below the 50 mid-point level suggests that manufacturing continues to contract, albeit at a slower pace. On balance, neither of these releases are likely to be substantial catalysts for Swissie price action, expressing themes that have almost certainly been priced into the exchange rate for some time.

Antonio Sousa is a Currency Analyst for FXCM.