Swiss Franc to Reverse Gains as Risky Assets Lose Momentum

Fundamental Outlook for Swiss Franc: Bearish

- Swiss Government Lowers Growth Forecasts as Trade Conditions Falter
- Retail Spending Weakens as Recession Deepens
- Investor Confidence Improves for a Fifth Month, Exports Decline

With close to nothing on the economic calendar, the Swiss Franc is likely to take directional cues from trends in risky assets and the US Dollar in the week ahead. Indeed, the Franc was the second-best performing currency last week, adding 5.2% against the greenback despite dour economic data and a commitment to intervene against further appreciation by the central bank. The US dollar selloff began with a rebound in risky assets and accelerated as the US Federal Reserve said it will buy $300 billion in Treasuries to lower long-term borrowing costs, weighing on yields paid on dollar-denominated assets.

Looking ahead, early evidence suggests that feverish US dollar selling may be close to over and will not be propping up the Franc against the greenback for much longer. There are substantial reasons to believe that the current rebound in risk appetite temporary, leaving the door open for a return to safety-driven demand for the US Dollar in the near term. The global growth outlook for 2009 remains grim, with the IMF calling for the biggest contraction in worldwide output since World War II. This bodes ill for demand and will almost certainly be reflected in disappointing earnings reports for some months to come. As the initial shockwave from the Fed’s actions dissipates, focus is likely to return to the bigger picture, putting renewed downward pressure on stock exchanges.

The technical outlook is supportive: the MSCI World Stock Index has been confined in a downward sloping channel since mid-October. The current rally began with a bounce at the bottom of this formation, and while there is still room to go until the channel top is tested, its downward slope argues for a bearish bias on risky assets for the time being. Topside resistance is further bolstered by the presence of a falling trend line established from the highs in May of last year. Together these will present a substantial hurdle for risky assets, suggesting further losses lie ahead. Turning to the US Dollar Index, prices are in range of key support at a rising trend line established from the lows set last July. This is reinforced by the 38.2% Fibonacci retracement of the 07/15/08 – 03/04/09 rally at 82.65, bolstering the case for a rebound.

All told, traders may see lingering support for the Swiss Franc through some of the coming week as the correction in risky assets and the US dollar continues to play out, but the scope of these catalysts looks decidedly limited and a return to downward momentum for the mountain nation’s currency is likely ahead. - IS