Fundamental Forecast for Swiss Franc: Neutral

-UBS Consumption Indicator slips to 1.195 in December from 1.255, the first decline in four months
-The KOF Swiss Leading Indicator for January rises for ninth straight month to 1.77

The Swiss Franc saw a sharp decline to end the week which has the appearance of intervention from the Swiss National Bank. The Euro/Franc had fallen below 1.4650 for the first time since early March, when we saw a major intervention from the central bank send the pair soaring by over 750 pips. Sinking Greek bonds have helped drag the Euro lower and bring the exchange rate to an uncomfortable level for policy makers. After defending 1.5000 for the second half of 2009 it appeared the SNB gave up the fight as an improing global and local economy helped ease deflation concerns. Indeed, we saw the KoF leading indicator in January improve for the ninth straight month signaling that growth will continue over the next six months. However, Europe is Switzerland’s main trading partner and continued appreciation of the Franc will curb demand for exports which could stall the recovery.

Concerns over the scope of a global recovery weigh the Swiss Franc against the dollar as safe haven flows lead to broader greenback support. The USD/CHF rose to its highest level since early September as the pair also saw a sharp rise to end the week on the expected intervention. The FOMC remain committed to keeping rate low for an “extended period” which is maintaining the dollar as a funding currency. However, the robust 4Q U.S. GDP figures could start to raise the yield outlook which should begin to alter the pair’s correlation with risk.

The economic calendar may offer some event risk with the SVME-PMI and December trade balance report. Any signs that demand from abroad is wavering could weigh on the Swiss franc. Economists are expecting an improvement manufacturing following last month’s first decline. Backlog of orders declined as manufacturers caught up with demand, but with inventory levels nearly rebuilt, there could be a drop in activity. However, risk sentiment will most likely be the main driver of price action on the week, unless we see the threat of intervention spur bearish Franc sentiment.

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