Fundamental Forecast for Swiss Franc: Bearish

- The KOF leading index for September rose to 0.85, its highest level in a year.
- UBS Consumption Indicator Fell to 0.658 from 0.747, the lowest since December 2003
- The SVME- PMI Jumped to 54.3 from 50.2, the highest in 15 months.

The USDCHF ended the week erasing gains from a mid-week spike that was rumored to be intervention from the Swiss National Bank. The synthetic price swing was much more evident in the EUR/CHF giving credibility to the theory. The central bank had no comment following the sudden Franc deprecation which wasn’t as obvious as the actions taken in June and March but may have been a mere reminder to markets that they stand ready to prevent further appreciation. On the week there were a number of significant fundamental indicators that gave a conflicting picture for growth. The UBS consumption indicator fell to 0.658 from 0.747, which was the lowest level in nearly six years. However, the KOF leading index and SVME –PMI both saw significant improvements supporting the improving outlook for growth. Indeed, the SECO recently raised its GDP forecast to -1.7% from -2.7% for this year with an expansion of 0.4% in 2010.

Risk sentiment continues to have influence on price action for the pair as the dollar has been strongly correlated with demand for high yeiding assets. However, we saw greenback weakness following the U.S. NFP report which could be a sign that the correlation is weakening. Therefore, Swiss fundamentals may grow in importance in determining future direction and traders should keep an eye on this week’s releases which include unemployment and consumer prices. Inflation is expected to remain unchanged at -0.8% which will keep the SNB on alert as they try and prevent deflationary pressures. Costs for domestic goods continue to fall as consumers remain reluctant to open up their wallets as rising unemployment weighs on consumption. Indeed, the unemployment rate is forecasted to rise to 3.9% from 3.8% as companies hurt by a decline in foreign demand are still in cost slashing mode. However, if demand from abroad continues to rebound as we saw in the SVME-PMI gauge then domestic growth will follow as the economy is heavily dependent on export demand. The USDCHF ran into resistance this week at 1.0499-38.2% Fibo of 1.0886-1.0179 and with a break below the 20-Day SMA, we may see continued Franc strength. Support could come at 1.0283-9/30 low, but a break there exposes the yearly low of 1.0184.

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