Fundamental Forecast for Swiss Franc: Bearish

- Swiss National Bank Maintains Rate at 0.25%, Concludes Corporate Bond Purchases
- Unemployment Rate Holds Steady at Five-Year High
- Swiss Franc Monthly Forecast

The Swiss franc strengthened earlier this week as the Swiss National Bank announced it will conclude its corporate-bond purchase plan ahead of the following year, but ended the week lower against the U.S. dollar and the euro, with the exchange rates rising to a fresh monthly high of 1.0364 and 1.51440, respectively. The shift in the market trend suggests that the greenback, which has been the primary funding currency in 2009, is being substituted by the traditional low-yielding currencies like the Japanese Yen and Swiss franc as the outlook for global growth improves.

Switzerland’s central bank held the benchmark interest rate at 0.25% in December and no longer saw a need to “intervene and buy more bonds” as “the spread in the Swiss franc bond market” narrows, and pledged to respond to “any excessive” moves in the exchange rate in order to encourage a sustainable recovery. SNB President Jean-Pierre Roth said that monetary policy “has been effective” after purchasing CHF 3.0B ($2.9B) in corporate bonds since March to counter the financial crisis, and expects economic activity to expand 0.5%-1.0% in 2010 after contracting at an annual pace of 1.5% this year. At the same time, the Mr. Roth held a dovish outlook for price growth and said that the outlook for inflation remains “associated with downside risks,” and the board is likely to maintain its current policy over the following year as Vice-President Philipp Hildebrand is scheduled to take helm of the central bank in 2010. Meanwhile, Mr. Hildebrand argued that normalizing policy in the following year will be the “biggest challenge” as the global financial system remains fragile, but saw little risk for a credit crunch within the region as the economy emerges from the recession.

As the SNB withdraws its emergency program and softens its rhetoric to intervene in the foreign exchange market, the low-yielding currency may continue to lose ground as the USD/CHF and EUR/CHF breaks out of its recent range however, we may see the Swiss franc bounce back over the following week as the economic docket is expected to reinforce an improved outlook for the region. Swiss producer and import prices are forecasted to grow 0.1% in November after falling 0.4% in the previous month, while the annualized rate is expected to contract 3.1% from the previous year after tumbling 4.7% in October. Moreover, industrial outputs are projected to weaken 0.1% in the third quarter after surging 2.7% during the three-months through June, and the slew of data could spark increased volatility in the exchange rate as investors weigh the outlook for future growth.

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