Fundamental Forecast for Swiss Franc: Bearish

- Speculative Sentiment Points to Bullish Swiss Franc Outlook
- USDCHF Seen as Best Vehicle to Trade US Dollar Rebound

The Swiss Franc may face selling pressure as prices look past an uneventful economic calendar to take directional cues from fading risk appetite amid a flurry of market-moving the fourth quarter earnings announcements.

The correlations between currencies and the broad trajectory of risk appetite across financial markets that seemed to fade in December have quickly resurfaced in the first weeks of 2010. The Franc has been no exception, with the correlation between the Swiss currency’s average trade-weighted value and the MSCI World Stock Index now at a hefty 92% versus 36% just a month ago and 63% as recently as last week. This hints at an acute sensitivity to the wave of fourth-quarter earnings reports scheduled for the coming week.

Announcements from top names in the financial sector are likely to be of particular interest after the market’s curious reaction to figures out of JPMorgan. The banking giant soundly beat profit estimates but fell short of analysts’ revenue expectations and made additional provisions for credit-related losses. The market easily shrugged off such details to rally on the strength of the headline earnings figure through much of 2009, whereas this time around the announcement sent Wall St sharply lower and boosting stand-by safe haven US Dollar and Japanese Yen against the spectrum of major currencies. The response suggests that the blind optimism that held sway over financial markets through much of last year may have finally given way to a more cautious posture, with investors increasingly concerned about the continuity of economic recovery absent fiscal and monetary stimulus. This means that a good earnings outcome at this point requires revenue growth, not just profits achieved on the back of cost-cutting (and in the case of the financials, trading amid market volatility). If JPMorgan was a sign of things to come, stock markets may be in for a sharp correction lower that promises to bring the Swiss Franc along for ride.

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