Fundamental Forecast for Swiss Franc: Bearish

- KOF’s leading forecast for growth is more optimistic than economists’ expectations for 2Q GDP
- German 2Q consumption and capital expenditures improve more than expected, boosting trade prospects
- USDCHF is skidding at the bottom of its well-worn range. Will the pair break or rebound?

The Swiss franc has seen bullish progression against most of its pairings this week. However, the few crosses that did not follow the beaten path highlight the primary fundamental drivers that surrounding the currency heading into the new week. The most prominent dissenter was CHFJPY, which weighs in on the most pressing theme underlying the franc’s progress today: risk appetite. It is this fickle, speculative force that has left the USDCHF locked in a 400 point range for the past three months and led broader market sentiment to flag over the past few weeks. Turning from the yen cross to the euro pairing, are focus adjusts from speculation to fundamentals. Measured against its largest trade partner, Switzerland is so far trailing the global recovery; and the lasting damage through a somewhat protectionist agenda and the slow degradation of its banking systems legendary privacy could permanently alter the currency’s place in the currency world.

There are deep economic shifts potentially underway and the franc is slowly losing its status as a safe haven currency; but for the immediate future, risk appetite remains the primary catalyst for direction and volatility. Through this past week, it seemed that the market was falling into a lull with liquidity thinning out for the summer. However, the congestion and stalled trends that overwhelmed our charts is more likely a ‘calm before the storm’ scenario. The gap between fundamentals and investment activities is growing ever wider; and this reality is working its way more surely into the general consensus. To sustain a rally that is fueled by capital gains, sidelined money must continuously flow into the speculative arena. However, volume behind equities, commodities and other transparent markets shows conviction behind an ongoing bull run is flagging. A dense round of data from the broader economic docket may spark a reconciliation between sentiment and economics. The interest rate decisions on deck (ECB and RBA) will likely show that even the most hawkish policy group is holding off on its definitive turn to rate hike. The influence of economic recovery forecasts will be in full swing. With GDP reports (Euro Zone, Australian and Canadian) and employment data (German, US and Canadian), it will be made more evident that a recovery from recession doesn’t mean we are by design heading straight into a strong period of expansion. The longer it takes the markets to adjust to the fact, the more dramatic the response.

It is true that risk trends hold the greatest potential for influence over the franc; but the economic docket will market its own impact through domestic channels. Top event risk is the reading of second quarter GDP. Unlike its Euro Zone counterpart, this is the first reading for Switzerland. Also, unlike its main-land peer, the Swiss economy is expected to have plunged deeper into recession through the three month period ending June. Both the forecast for a 1.0 percent contraction through the quarter and 3.0 percent pace of decline over the year would be the worst on records going back to 1980. Switzerland is dependent on the health of the region to consumer its exports. However, with the market appreciation of the franc over the past months and years, we will see a lack of demand is severely complicated by an unfavorable exchange rate that will no doubt delay a recovery that is finding woefully little support domestically.

On the topic of trade and the exchange rate, it is important to always monitor the Swissie’s place in the FX market. The sanctity of the its safe haven status is particularly important to how the market responds to the currency. The SNBs efforts at intervention produce an unwanted sense of volatility – something particularly unwelcome for a carry candidate. Going one step further, it is also considered a protectionist measure at a time when policy officials are trying to avoid such steps to facilitate a global recovery. This could isolate and perhaps further damage the currency’s reputation. But the most concerning potential loss is the absolute privacy of the nation’s banking system. After the US successfully lobbied the government for records on American accounts, the term ‘Swiss Bank Account’ seems tarnished.

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