The Swiss Franc may see heavy volatility towards the end of the coming trading week as the Swiss National Bank weighs up an increasingly credible deflationary threat.
[B]Fundamental Forecast for Swiss Franc: [/B][B]Bearish[/B]
- Swiss Unemployment Rate Rises to the Highest in Three Years
- Sentiment Suggests Franc Will Continue to Rally Against US Dollar
The Swiss Franc may see heavy volatility towards the end of the coming trading week as the Swiss National Bank weighs up an increasingly credible deflationary threat. The last policy meeting saw the SNB announce one of the most aggressively dovish monetary policies of all the top economies, sending the Franc tumbling with promises of quantitative easing and currency market intervention in effort to keep price growth from settling in negative territory. Since then, the annual pace of consumer price growth has dropped to a record-low -1.0% and appears likely to extend losses as Producer Prices tumble -5.8% in the year to May, hinting at shrinking price tags on final goods as firms pass on lower input costs. Another downward revision to the government’s official economic forecasts in the June edition of the SECO report would further support a need for greater easing. Although overnight index swaps reveal that traders are pricing in virtually no chance of a change in benchmark interest rates, an expansion of unconventional policies seems likely. That said, it is uncertain what such actions could practically look like considering the SNB is already throwing everything but the kitchen sink behind its monetary efforts, adding to the likelihood of erratic price action as the announcement hits the tape.
Beyond the SNB policy announcement, risk trends will be an important thing to watch as a catalyst for the Franc’s directional momentum. The Swiss unit has been clearly diverging from its traditional role as a safe-haven asset, with that role dominated primarily by the US Dollar and to some extend the Japanese Yen in recent weeks. Indeed, short-term correlation studies show that a trade-weighted average of the Franc’s value against major counterparts is now 79.5% positively correlated with the MSCI World Stock Index and -78.7% negatively correlated with the US Dollar Index, suggesting any downward reversal in risky assets will see Swiss currency may follow other European currencies lower against the greenback. - IS