Swiss Franc Direction May Be Determined By SNB Rate Decision

Fundamental Outlook for Swiss Franc: Bearish

- SVME PMI fell to a record low of 32.6 from 35 in January, as manufactures cut production on declining demand
- Swiss GDP fell 0.3% in the 4Q which was the most since 2004, confirming that the economy was in a recession.
- Inflation unexpectedly rose 0.2% in February on higher food and clothing costs.

The Swiss Franc broke below the 20 and 100 Day SMA’s to end the week as the currency gained from broad based dollar weakness. However, the pair found support at 1.1500 which has held since February 4th. The Franc spent most of the week stuck in the 1.1700-1.1800 range despite a record low SVME-PMI and 4Q GDP contracting by 0.3%. The Swiss economy officially entered its first recession in six years as the fourth quarter decline followed a 0.1% contraction in the prior three month period. An 8.1% drop in exports was the main source of the negative growth as the global downturn has hurt demand for Swiss goods. The outlook doesn’t look bright for the export driven economy as its main trading partners the U.S. and Europe find themselves in deepening recessions themselves. Despite declining growth consumer prices in the country unexpectedly rose for a second month to 0.2% in February, as food and clothing costs rose.

Although rising inflation is justification for the SNB to consider raising rates, the dearth in growth will most likely lead the central bank to keep rates at 0.50% or lower them to zero at their upcoming rate decision. The Swiss National Bank was one of the first to aggressively cut their benchmark rate and continues to focus on getting the economy growing again. SNB Chairman Jean-Pierre Roth reiterated that commitment in a letter to his staff when he announced he was retiring at the end of the year. Therefore expect the central bank head to do everything in his power to leave the economy in the best shape possible before his departure. He also warned that “The impact of the financial crisis will be felt for a long time” and “the creation of a new economic upturn and the reform of the international financial system will therefore take all the attention of the Swiss National Bank in coming years”. Therefore, if the central bank paints a grim picture following their expected rate hold then we could see the Franc reverse recent gains and return back to the 1.1700 -1.1800. However, if the pair manages to cleanly break below 100-Day SMA at 1.1539 then it could be heading for a test of the 50-day SMA 1.1411.-JR