Fundamental Forecast for Swiss Franc: Bearish

- Risk appetite falters, is this a true trend change or just a much needed break?
- USDCHF follows EURUSD with a steep dollar rally; but there is notable resistance for the former

The Swiss franc had a mixed week. Against the euro, Australian and Canadian dollars; the currency marked substantial gains. However, against the Japanese yen and US dollar; the franc would actually loose substantial ground. This is evidence that speculators were still using the Swissie as a funding currency for the carry trade through the speculative build up over the past year – though there was obviously greater interest in using the dollar and yen for this broad investment strategy to establish greater returns and better stability. Heading into next week, the franc will find its direction primarily from underlying investor sentiment; but we need to put that driver in the context of its own standing on the risk spectrum rather than just labeling it a ‘safe haven’ or ‘funding’ currency.

Establishing what the direction and momentum behind risk trends will be going forward is a practice in speculation. However, the probabilities in defining sentiment are perhaps easier than placing a trade. To garner a sense of the level of confidence among speculators going forward, we can look at where we ended this past week off. Heading into the close of the week, the benchmark US equity indexes plunged to fresh two-month lows following the strongest three day sell off that we have seen from the Dow Jones Industrial Average that we have seen since the beginning of 2009. This level of conviction is remarkable. Looking into the market influence this will have, the Asian and European markets will have to adjust to the additional losses sustained by the US markets into the close of their own session. This will cast a bearish shadow that could simply drive momentum. In addition we need to be weary of major pieces of event risk due next week. Among the critical releases we have scheduled are the advanced readings of 4Q GDP for the US and UK. These are the leading industrial growth releases and they will be treated as benchmarks for the health of the globe. Going one step further, we have three monetary policy decisions (the BoJ, Fed and RBNZ) which will define the reward component of the risk/reward that is always balanced in the market. Even the many sentiment gauges (US consumer confidence, German IFO, German GfK) will play into a broader sense of fear that is supported through the week.

On a side note, Swissie traders should also keep track of EURCHF. This pairing juxtaposes two currencies that are fundamentally intertwined. Yet, despite the economic dependency between the two –and more importantly the effort by the SNB to prevent its own currency from appreciating – the exchange rate continues to decline. This is a reflection of the still latent role of funding currency that franc maintains due to its excessively low market rates. While traders continue to unwind their carry positions, they are making more trouble for the Swiss policy markers. If the central bank made an effort to hold back the tides on this exchange rate because it was driven by speculative interest before; they are certainly within their means to step up their fight now. Watch for commentary that comes from any of the policy markers; but also look for sharp bullish moves that have seemingly little justification through the normal channels of volatility (data and risk tides).

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