Fundamental Forecast for Swiss Franc: Neutral

- Swiss producer & import prices stopped falling in March for the first time since 2008.
- USDCHF – Swiss Franc Appears Vulnerable

The Swiss Franc started the past week on a strong note as numbers were put to an IMF-Euro member bailout for Greece, easing concerns that the troubled nation would default on their debt. The country’s dependence on demand from the Euro-zone has seen its currency trade in tandem with the Euro making its susceptible to news from the region. The IMF team is expected in Athens on the 19th to discuss details of the potential aid package which has raised concerns that Prime Minister Papandreou will ultimately look to receive the funds. The government was hoping that attaching a monetary value to the potential relief would calm markets fears. A successful bond auction was encouraging but since then the deal's deliberate vagueness and uncertainly over how long the payout would take, ultimately led to a jump in spreads, with the yield spread between Greek and benchmark German 10-year bunds increasing to about 4.15% at one point. Surprisingly, the concerns didn’t weigh that heavily on the Franc with the currency still managing to squeeze out some gains on the week against the greenback, despite the flight to safety following the Goldman Sachs fraud allegations.

On the domestic front producer & import prices were flat on an annualized basis which brought an end to its two year slide. Higher energy costs are offsetting the impact from a strong franc which should help the SNB’s concerns over deflation. Policy makers will still desire to limit the franc appreciation against the Euro and dollar but may be more inclined to let markets self correct with signs of rising prices combined with recent evidence of an improving economy. The upcoming economic docket doesn’t offer much event risk despite the fact that Swiss fundamentals typically have little impact on price action, as only the trade balance report is worth any attention. A look at last month’s watch export report we see that the main sources of growth in demand were found in China, United Arab Emirates and the U.S. If the upcoming report shows continue strength from those regions then the country may see its dependence on Europe fade which could generate divergence between the Franc and Euro. We don’t expect this to be something that happens immediately or to have a significant impact on direction but a dynamic to be aware of going forward.

Ultimately, Franc direction will come from the European news cycle and broader risk trends which currently are stacking up against the currency. The 20-Day SMA slowed the USD/CHF’s advance which could lead to a retracement to start the week. However, a broader developing range points toward a re-test of 1.0700 with a break above the technical indicator.

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