Fundamental Forecast for Swiss Franc: Neutral

- Swiss Franc to test range amid Swiss National Bank Intervention
- Biggest-ever improvement in Swiss KOF boosts sentiment

The Swiss Franc finished the week almost squarely unchanged against the Euro and US Dollar, but earlier-week price action saw the Swissie noticeably weaker on the broad rally in risky asset classes. The Euro hit fresh post-intervention highs of SFr 1.5350 before the week was through, but a substantial pullback on Friday erased all its gains. The fact that the sharp and unexpected EUR/CHF reversal happened just ahead of the European session close suggests it was a function of month-end account squaring. What that means for future price action is substantively less clear, but it suggests that global investor demand for the Swiss currency remains strong. We have previously argued that continued CHF appreciation had less to do with forex speculators and with demand for safe-haven assets. Said developments imply that we may continue to see markets buy CHF despite the threat of Swiss National Bank intervention, and it will be interesting to watch whether the EUR/CHF can once again test the SNB’s SFr 1.5000 and force the central bank to intervene in FX markets.

Swiss economic event risk picks up substantially in the week ahead, and it will be interesting to watch whether individual news releases will finally force volatility across CHF pairs. We have recently seen markets show little interest in domestic economic data, and the Swiss Franc has proved far more sensitive to financial risk sentiment barometers. Indeed, the Swissie remains one of the most highly-correlated currencies against the US S&P 500. Of course, any especially large surprises out of upcoming Swiss Consumer Price Index numbers, SVME Purchasing Managers Index survey results, or end-of-week employment figures could potentially shift prospects for the otherwise safe-haven currency.

The Swiss National Bank has made it clear that it will continue to fight CHF appreciation in the face of clear deflationary pressures. Given the landlocked economy’s strong dependence on imports, a stronger Franc means lower prices in domestic markets. Consensus forecasts predict that prices fell a sizeable 1.1 percent in the year ending in July—what would amount to the strongest drop in five decades. Barring a substantial surprise, it seems that the SNB will remain justified in its aims to combat deflation. That said, any signs of a bounce in prices could cool speculation that the SNB will continue to intervene in CHF markets. Otherwise, it will be important to watch for noteworthy moves in Unemployment data. Swiss jobless rates still remain a relatively low 3.6 percent, but mounting job losses could easily increase pressures on officials to act in the face of economic headwinds. Thus it remains a waiting came with the SNB.

The Swiss National Bank has proved quite capable in preventing the EUR/CHF from falling below 1.5000. It will be interesting to watch if FX markets can test the central bank’s resolve in the week ahead.

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