Fundamental Forecast for Swiss Franc: Neutral

- Speculative Sentiment Hints Swiss Franc Bias Bullish
- Currency Options Suggest USDCHF Gains to Continue

The Swiss Franc is likely to remain volatile next week after the currency fell to a record low against the Euro, with currency traders daring the Swiss National Bank to make good on their promise to manage the pace of appreciation with direct intervention into the markets.

Swiss authorities have been overtly managing the EURCHF exchange rate as a bulwark against deflation and a stabilizer for economic growth since March 2009 and more of the same seems likely ahead. Indeed, Swiss Economy Minister Doris Leuthard said as recently as Friday that policymakers “have to be able to rely on a certain limit not being crossed” as the Franc appreciates, with a stronger currency threatening to “severely affect Swiss exporters and the tourism industry.” The comments came after the currency appreciated to as much as 1.40 against the Euro, the strongest since the single currency was introduced in 1999. The rally was encouraged by April’s CPI report, which showed the annual inflation rate held at 1.4 percent, matching a 17-month high and hinting that the SNB may now have room to relax its deflation-fighting posture.

While it is reasonable that the SNB did not instantly react to the EURCHF, choosing not to fight a broad exodus from the Euro amid growing panic about the festering sovereign debt crisis in southern Europe, Eurozone policymakers may provide the Swiss central bank with an opportune opening at the start of the coming week. Indeed, German Chancellor Angela Merkel announced that leaders of the currency bloc have agreed to take “joint measures” to defend EUR against speculators, saying, “There’s a high level of speculation against the Euro as a whole and we reaffirmed that we’re all committed to the [its] stability.” Policymakers will meet on Sunday to work out the details of a mechanism to “defend ourselves against speculators,” Merkel added. While much of this is surely bluster – in fact, the EZ stands to benefit from a weaker currency as a boon for exporters and a way to lower the burden of the region’s public deficits – the announcement of some sort of Euro backstop scheme may give the currency a near-term lift and offer the SNB a path of least resistance to push EURCHF sharply higher.

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