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[B]Swiss Franc Outlook Remains Bleak as Growth and Inflation Falter[/B]
[B]Fundamental Outlook for Swiss Franc: [/B][B]Bearish[/B]
- Swiss Leading Indicator Falls to Record-Low in April
- UBS Consumption Indicator Increases as Falling Prices Boost Spending Power
The Swiss franc was little changed against the greenback this week as market participants continued to weigh the likelihood for another SNB intervention however, the low-yielding currency weakened against the euro and may face increased selling pressures over the following week as the economic docket is expected to reinforce a weakening outlook for growth and inflation. At the same time, as U.S. regulators are anticipated to release the results of the bank ‘stress test’ next week, a rise in risk aversion could spur increased demands for the franc as market participants curb their appetite for high risk/reward investments. Moreover, as SNB Vice Chairman Phillip Hildebrand, who has been appointed to lead the central bank following Chairman Jean-Pierre Roth’s retirement at the end of this year, adopts a wait-and-see approach, increased speculation that policymakers will postpone its efforts to stem the appreciation in the Swiss franc may continue to drive the exchange rate higher as market sentiment falters.
Meanwhile, consumer prices in Switzerland are expected to rise 0.6% in April, while the headline reading for inflation is projected to fall 0.6% from the previous year, and as the SNB forecasts price growth to fall further over the next three years, a dismal CPI reading could weigh on the exchange rate as the risks for deflation intensify. In addition, the annual rate of unemployment is widely expected to reach a three-year high of 3.4% from 3.3% in March, while manufacturing activity is anticipated to contract for the eighth consecutive month in April, and the slew of market-moving data is likely to reinforce a weakening outlook for growth and inflation as the region faces its worst economic downturn in over three-decades. Nevertheless, as policymakers pledge to mitigate the downside risks for long-term stability, the SNB is likely to increase its purchases of foreign currencies to stem the spillover efforts of the worst financial crisis since the Great Depression, and market participants speculate that the EUR/CHF will continue to push higher over the near-term as the central bank attempts to put a floor on the exchange rate. As a result, we may see the euro continue to advance against the swissie over the following week, and the pair may attempt to make a run for the 200-Day in the weeks ahead to retrace the sell-off from December. On the other hand, as risk trends continue to drive price action in the financial markets, a drop in risk appetite following the results of the U.S. bank ‘stress test’ could boosts demands for the Swiss franc as the low-yielding currency continues to benefit from safe-haven flows. - DS