Fundamental Forecast for Swiss Franc: Neutral

- Swiss National Bank leaves benchmark rate unchanged at 0.25%
- Consumer Prices Decelerated to 0.9% from 1.0%, despite a 0.1% increase in February
- The Swiss unemployment rate fell to 4.4% from 4.5%, but was unchanged at 4.1% on a seasonally adjusted basis.

After starting the week on a choppy note the Swiss Franc saw its appreciation begin to accelerate despite the SNB reaffirming their commitment to prevent excessive franc appreciation. The statement came following the central bank’s policy meeting where they left the benchmark rate unchanged at 0.25%. Building optimism and an unexpected surge in Euro-zone industrial production were the main drivers of Franc support to end the week. The Swiss unit has tracked the single currency as its economic fortunes are dependent on the Euro-area’s recovery. Policy makers have looked to limit the local currency’s appreciation against the Euro but despite the threat of intervention the EUR/CHF closed below 1.4600 for the first time in over a year. The Franc also reached the highest level in a month against the dollar and yen as markets reversed the flight to safety flows generated by the issues in Greece.

The Swiss National Bank raising their forecasts for inflation and growth also helped generate bullish Franc sentiment. Consumer prices are expected to grow by 0.7% in 2010 up from their previous forecast of 0.5%, eventually accelerating to 0.9% in 2011. However, the SNB did caution that the danger of deflation can’t be entirely ruled out which has them on alert to defend any excessive Franc appreciation against the Euro. The central bank also bolstered their outlook for growth to 1.5% from 0.5%-1.0%, as they see tangible signs of a recovery. Swiss consumer prices decelerated from 1.0% to 0.9% in February despite a 0.1% increase during the month, justifying the central banks concerns.

A continuation of risk appetite should see further Franc gains against the dollar and Yen. However, signs that returning growth is fueling broader inflation could raise interest rate expectations. The FOMC rate decision may be the biggest event risk for the Swiss unit as rising interest rate expectations will weigh on the outlook for growth, generating risk aversion. The domestic economic calendar isn’t typically market moving with export data and the SECO forecast the highlights. The Swiss trade balance report for February will provide the temperature for foreign demand and whether the pace of the recovery is sustainable. SECO forecasts will be compared to those of the central bank and major discrepancies could alter sentiment and the outlook for monetary policy. Of course the wild card is possible SNB intervention, especially with the EUR/CHF testing the levels that were seen when the central bank made its major move in March, 2009.

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