The Swiss Franc rallied nearly 300 pips to end the week as comments from Vice-chairman Phillip Hildebrand sparked a sharp move in the currency.
[B]Swiss Franc Recent Strength Puts It At Risk For Verbal Intervention[/B]
[B]Fundamental Outlook for Swiss Franc: [/B][B]Bearish[/B]
- Swiss ZEW Survey improved from -57.1 from -27.7, as investor confidence rose for a sixth month.
- Swiss Trade Balance surplus shrunk to 0.12 from 0.72 billion, as exports fell by 5.0%
The Swiss Franc rallied nearly 300 pips to end the week as comments from Vice-chairman Phillip Hildebrand sparked a sharp move in the currency. Markets interpreted the soon to be Chairman’s statement “We have to have the patience to let the medicine work before we look at more steps like negative rates,” as a sign that he is postponing possible intervention. The statement completely contradicted earlier comments in which the new chairman pledged to prevent further gains in the Swiss Franc to avoid the country sliding into deflation. In the interview the Swiss policy maker would also say that the impact of the global recession wouldn’t fully hit the country until the second half of the year as the labor market continues to deteriorate. The Swiss trade balance would support the dour outlook as the country saw its surplus fall to 0.12 billion as exports fell 5%, which was the lowest since August 2005. The export driven nation will continue to suffer as global demand weakens and mounting job losses continue to impact domestic growth. On the bright side, in a separate interview the Vice-chairman said that the country’s banks weren’t in a bad state and the its economy should weather the financial storm relatively well compared to other countries like Germany. That sixth straight month of improvement in the Swiss Zew survey demonstrates that markets participants are becoming more optimistic about future growth prospects.
The impact on consumer demand will be measure by the upcoming UBS consumption indicator which last month fell to a fresh record low of 0.886. Further deterioration in domestic demand may be expected with the labor market expected to continue to deteriorate. The forecasts for the KOF leading indicator to fall to -1.90 from an already record low -1.79 supports the Vice-chairman’s forecast the recession will steepen in the second half of the year. Although fundamentals traditionally have little impact on the pairs price action, further deterioration in the economy will raise speculation of future intervention from the central bank. Fears are growing that considering the recent strong move of the Franc that we could se at least some verbal intervention from the Vice-chairman as he looks to offset his most recent comments. Technically the pair has started to move higher after touching the 200-Day SMA which has provided firm support since the beginning of the year. Therefore, we could se the pair trade higher with a possible retrace back above the 50-day SMA at 1.1544.- JR