The Swiss franc is expected to hold a bearish tone going forward as the Swiss National Bank forecasts the economy to face its worst economic slump since 1975, and is likely to weakening against all of its major currency counterparts in the week ahead as the central bank intervenes in the currency market to stem the appreciation in the exchange rate.
[B]Swiss Franc To Hold Bearish Tone as SNB Intervenes, Lowers Forecasts[/B]
[B]Fundamental Outlook for Swiss Franc: Bearish[/B]
- Swiss National Bank cuts 25bp to 0.25%, currency intervention and CHF bond purchases to follow
- Swiss unemployment rate rises to 3.1%
- Producer & import prices fall further, raising risks for deflation
The Swiss franc is expected to hold a bearish tone going forward as the Swiss National Bank forecasts the economy to face its worst economic slump since 1975, and is likely to weakening against all of its major currency counterparts in the week ahead as the central bank intervenes in the currency market to stem the appreciation in the exchange rate. Moreover, the board said that it will ‘purchase Swiss franc bonds issued by private sector borrowers in order to bring about a relaxation of conditions on the capital markets’ even after lowering the benchmark interest rate by another 25bp to 0.25% during the week, and supported its actions by saying that ‘decisive action’ was needed in order to cushion the landing of the economy. Furthermore, as policy makers expect growth and inflation to weaken further, fundamental headwinds are likely to weigh on the low-yielding currency as the economic calendar for the following week is anticipated to show a deepening downturn in the region.
The SNB lowered their growth forecasts for 2009, stating that the economy ‘has deteriorated sharply since last December,’ and projects GDP to contract between 2.5-3.0% this year as trade conditions falter. Governor Jean-Pierre Roth argued that the extraordinary efforts taken on by the central bank was ‘neutralized’ by the appreciation in the exchange rate, and said that they needed to stem the rise in the currency ‘vis-a-vis the euro’ for the rate cuts to take effect as the Euro-Zone, Switzerland’s biggest trading partner, consumes more than half of if its exports. Nevertheless, as economists forecast the euro-region to face its worst economic downturn since World War II, the new policy objectives instilled by the SNB may fall short of expectations, which could lead the central bank to adopt additional tools to steer the economy out of a deepening recession. Meanwhile, SNB Governor Roth went onto say that the board see a ‘risk of negative inflation over the next three years’ as they anticipate the annual rate of inflation to fall 0.5% this year and projects price growth to be ‘very close to zero’ in 2010 and 2011, and as the risks for deflation intensify, the board will continue to employ all of its available tools as they maintain a 2% target for inflation. Likewise, as the central bank continues to hold a dour outlook for growth and inflation, increased turmoil across Europe is likely to drag on the export-driven economy, which would continue to reinforce a bearish outlook for the franc going forward. - DS