Fundamental Forecast for Swiss Franc: Neutral

- Swiss Leading Index Advances Hits Two-Year High
- SNB Maintains Pledge To Prevent Excessive Appreciation

The Swiss Franc lost ground against the greenback, with the exchange rate advancing to a fresh monthly high of 1.0923, while the low-yielding currency pared the previous week’s decline against the Euro as the uncertainties surrounding the Greek bailout spurred increased demands for the safe-haven currency. As a result, Swiss National Bank President Philipp Hildebrand said that it is imperative that the negotiations between the IMF, EU, ECB, and Greek policy makers “be determined rapidly” during the SNB’s annual shareholders meeting, and pledged to act “decisively to prevent an excessive appreciation” in the exchange rate as it poses a risk for the economic recovery.

In addition, Mr. Hildebrand argued that there would be a “negative impact” if safe-haven flows continue to drive the nation’s currency ”sharply” higher, but reiterated that the governing board has “sufficient leeway” to keep the benchmark interest rate close to zero as it aims to encourage a sustainable recovery. At the same time, the central bank head noted that borrowing costs cannot stay low indefinitely “without compromising medium and long term price stability,” but added that the “risks for deflation has fallen in the wake of the economic recovery” as policy makers aim to balance the risk for growth and inflation. Moreover, President Hildebrand held an improved outlook for the economy as “public finances are relatively healthy, the financial position of both households and corporate are sound, and the labor market is flexible,” and noted that “the challenge lies in selecting the right moment for a normalization of monetary policy” as the recovery gathers pace. As a result, an article from the Wall Street Journal showed some market participants expect the SNB to limit its purchases of foreign currencies as the risks for deflation dissipate, and the central bank may show increased tolerance to the strength in the Swiss Franc as growth prospects improve.

Nevertheless, the economic docket for the following week is expected to show manufacturing expanding at a slow pace in April as market participants forecast the purchasing managers index falling back to 64.5 from 65.5 in the previous month, while consumer prices are expected to grow at an annualized pace of 1.3% during the same period after expanding 1.4% in March. As the rebound in growth and inflation temper off, the SNB may continue to intervene in the currency market as it aims to stem the risks for the economy, but a drop in the unemployment rate paired with a rise in household spending is likely to encourage an enhanced outlook for future growth as policy makers expect to see the recovery gather momentum going forward.

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