Fundamental Forecast for Swiss Franc: Neutral

- Swiss Trade Surplus Narrows on Falling Exports
- USD/CHF SSI Ratio Pulls Back From Bullish Extremes

The Swiss franc continued to hold a broad range against the U.S. dollar and the euro, and the low-yielding currency is likely to remain range-bound over the near-term as investors weigh the outlook for future policy. The USD/CHF held a 195pip range throughout the week, with the pair holding below the 20-Day moving average, and the dollar-franc may trade along the lower-end of its broader range in the week ahead as the greenback continues to lose ground against its major counterparts. At the same time, the euro continued to appreciate against the Swiss franc, with the pair topping out at a high of 1.4256 this week, and the EUR/CHF may continue to retrace the sell-off from earlier this month as investors anticipate the Swiss National Bank to increase its purchases of foreign currencies.

A report by the SNB showed foreign currency holdings rose 46% in the second-quarter to its highest level in at least 12-years as the central bank attempts to stem the appreciation in the franc, and market participants anticipate Governor Jean-Pierre Roth to expand purchases of the euro in an effort to soften the landing of the economy. The central bank said greenback holdings increased to $19.9B from $13.2B in the first quarter, while purchases of the single-currency jumped to EUR 32.0B from EUR 20.3B during the three-months through June, and policymakers may continue to intervene in the foreign exchange market as they try to steer the nation out of its first recession in over a decade. Meanwhile, a report by Bloomberg News showed the risk premium for the Swiss franc over the U.S. dollar remains higher than the spread between the euro and the British pound, and the discrepancy in purchasing power parity may lead the central bank head to act as they expect economic activity to remain subdued throughout the following year. As a result, increased speculation for an intervention is likely to push the EUR/CHF higher over the near-term, and we may see the rally in the euro-franc continue to be supported by the 100-Day moving average going forward. Nevertheless, the economic docket is expected to reinforce in improved outlook for the region as economists forecast the KOF leading indicator to rise to -1.45 in July from -1.65 in the previous month however, another unexpected drop in the UBS consumption indicator could weigh on the economic outlook as growth prospects falter.

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