Swiss Franc To Face 1Q GDP, Record-Drop in Consumer Price Growth

[B]Swiss Franc To Face 1Q GDP, Record-Drop in Consumer Price Growth[/B]

[B]Fundamental Outlook for Swiss Franc: [/B][B]Bearish[/B]

The Swiss franc advanced to a five-month against the U.S. dollar and strengthened against the euro this week despite speculation for an intervention by the central bank, and the low-yielding currency may continue to appreciate against its major counterparts over the following week as investors raise an improved outlook for future policy. At the same time, the International Monetary Fund continued to hold a dour outlook for the region, stating that the “economy is projected to experience a significant contraction in the near-term, with sizeable downside risks to the outlook” as the region faces its worst economic downturn in over a quarter century. The IMF argued that the Swiss government should allocate additional stimulus in 2010 “given the severity of the current downturn and the available fiscal space” as the group forecasts the annual rate of growth to contract 0.3% next year.

Nevertheless, the economic docket for the following week is likely to reinforce a dour outlook for the Swiss economy as the 1Q GDP reading is expected to show a 1.5% drop in economic activity, which would be the biggest contraction since the first quarter of 1991, and fears of a deepening downturn is likely to weigh on the exchange rate as the outlook for growth and inflation remains bleak. In addition, consumer prices are projected to fall 1.0% in May from the previous year to mark the largest drop in over half a century, and the data could increase speculation for an intervention by the SNB as the central bank continues to see a risk for deflation. Moreover, as the Swiss leading holds at a record low and foreshows a weakening outlook for economic activity, policymakers may take additional steps over the near-term as growth prospects deteriorate, and central bank Governor Jean-Pierre Roth may continue to utilize unconventional tools to stimulate the ailing economy as the governing board maintains a dovish outlook for future policy. As a result, we may see the EUR/CHF retrace the recent decline over the following week, and may make another attempt to push above the 200-Day moving average. Meanwhile, the USD/CHF may continue to push lower on the back of dollar weakness, and may fall below 1.07 to test the January low. - DS