Fundamental Outlook for Swiss Franc: Neutral

- Speculative Sentiment Favors Swiss Franc Gains vs US Dollar
- Currency Options Analysis Yields Mixed Swiss Outlook
- Futures Positioning Hints of Possible Franc Trend Reversal

The Swiss Franc is unlikely to repeat last week’s one-sided gains, with a more nuanced outcome up ahead as the currency is pulled in opposing directions by the catalysts driving its major counterparts.

Franc strength seems likely to endure against the Euro, with the single currency unlikely to hold on to last Friday’s gains in the aftermath of a European Union deal on an IMF-assisted plan to bail out Greece. The episode exposed deep divisions within the Euro Zone, with Friday’s knee-jerk rally likely to give way to concerns about what the outcome means for the EU’s approach to dealing with potential future crises in larger countries. Indeed, the sloppy response to a flare-up in a relatively small member state like Greece – a mere 2.6 percent of the Euro Zone’s overall economy – invites decidedly unfavorable expectations about the kind of havoc that could be caused should a similar fate befall a country like Spain (11.8% of EZ GDP) or even Italy (17% of EZ GDP). However, a more sober reading on the aftermath of the Greek fiasco is also likely to broadly boost the US Dollar against the spectrum of their major counterparts, including the Franc, as investors face the uncomfortable reality that the world’s largest economy and its only viable alternative to America’s financial markets is unable to keep its house in order. Should this also bring prove to lay the foundation for the return of broader risk aversion, the Japanese Yen may join USD in pushing higher against the Swiss unit.

Meanwhile, the Franc is likely to gain against the commodity bloc with the Australian, Canadian and New Zealand Dollars apparently intent on correcting lower with or without a parallel decline in risky assets. Indeed, although stocks advanced and the greenback retreated in Friday’s trade, the three commodity dollars proved to be the worst performers on the day. The issue might be that of valuation, with purchasing parity studies suggesting that the Australian and New Zealand Dollars now over 24.1 and 16.1 percent overvalued while the Canadian Dollar trades 12.2 percent above its implied fair exchange rate against the four major currencies plus the US Dollar. However, PPP analysis also suggests that the British Pound is deeply undervalued across most its pairings in the G10 including the Franc, hinting that GBPCHF may see upward correction. Indeed, sterling is now 15.5 percent below its PPP-implied value against the Swiss currency.

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