Swiss Franc 2009 Forecast

How Did the Swiss Franc Trade in 2008?

2008 was the revenge of the low yielders.  The Swiss Franc and the Japanese Yen were the best performing currencies of the year, followed by the US dollar, which only became the second lowest yielding currency in March.  The fact that the Japanese Yen was the only currency to appreciate against the Swiss Franc indicates how much of an impact interest rates had on the currency’s performance.  When the markets were nervous and economic climate is as uncertain as it was last year, investors rush out of high yielding currencies, which typically have more risk into lower yielding ones, which typically have less risk.  This helps to explain the Franc’s 25 percent appreciation against the British pound, New Zealand and Australian dollars.   Looking ahead, we could see more gains in the Swiss Franc, but that will be largely dependent upon the market’s risk appetite.  

Recession Expected in 2009

Like Australia, the global recession has yet to hit Switzerland, but in 2009, it may be difficult for the country to avoid one.   GDP growth in the third quarter was flat and it may be only a matter of time before we start seeing a contraction.  The annualized pace of GDP growth has already fallen materially from more than 3 percent in Q1 to 1.6 percent in the Q3.  Although Switzerland has proven to be more economically resilient than its Eurozone counterparts, they are not immune to the global economic crisis. The country is heavily dependent upon its financial services industry or foreign investment and unfortunately the sector has been hit hard by the credit crisis.  UBS, Switzerland’s largest bank has already report billions in write-downs and is planning to split its investment banking and wealth management businesses.  After cutting interest rates in December, Swiss National Bank President Roth predicted that 2009 will be a year of recession.  They expect GDP to growth to contract between 0.5 to 1 percent in 2009.  The UBS Consumption hit a 3.5 year low in the month of November while the KoF leading indicators report fell to a 5 year low in December.  This confirms that more weakness is ahead for the retail sector and the economy as a whole.  However with that in mind, like the Japanese Yen, the Franc does not always move on Swiss fundamentals.  Instead, it usually moves on the market’s risk appetite.  

Inflation: Big Nose Dive Expected to Continue

Inflation is declining rapidly in Switzerland.  The latest consumer price figures were for the month of November and based upon the report, inflation dropped the most in 15 years.  On a monthly basis, CPI declined by 0.7 percent.  This dragged the annualized pace of CPI growth down from 2.6 to 1.5 percent.  Although the franc rose against the Euro for most of the year, its early sell off against the US dollar limited the impact of foreign exchange fluctuation on price pressures.  Falling oil prices therefore drove inflation lower.  Price pressures are expected to slow further in the 2009.  The Swiss government expects inflation to average 0.7 percent next year which is next to nothing.  Softer inflation pressures increases the central bank’s flexibility to leave monetary policy easy.  

Zero Interest Rates for Switzerland?

The Swiss National Bank has been full of surprises this year.  They delivered a series of intermeeting rate cuts that took interest rates to the lowest level in 4 years.  Over the course of 2 months the SNB cut interest rates by 225bp to 0.5 percent and even though interest rates are very low, after their December rate cut, the SNB suggested that they are open to taking interest rates to zero.  The slowdown in the global economy has taken a big toll on Swiss economy and if economic conditions worsen, the central bank is ready to take further action if needed.  With interest rates at ultra low levels, the Swiss central bank may need to start thinking about unconventional options like Quantitative Easing.  Of course they would not be alone because it is a road that the Federal Reserve and the Bank of Japan have already taken.  There is also talk of currency intervention, but we do not think that it is likely. The SNB has been very proactive this year and they will continue to do all that they can to support the economy in 2009.  However as the third lowest yielding currency developed, as long there is uncertainty in the financial markets and the global recession deepens in the first few months of year, the Swiss Franc may still appreciate despite the dismal outlook for the economy.  

Technical Outlook for EUR/CHF

It has been a rollercoaster ride for EUR/CHF this year.  After retracing 61.8 percent of the October 2007 to October 2008 sell-off, the currency pair reversed violently.  It is now trading back within our Bollinger Band sell zone and as a result the downtrend has resumed.  As long as the currency pair holds below 1.51, the 50 percent Fibonacci retracement of the latest rally, we could see a further move back towards 1.4725, the October low.  If the currency pair breaks above 1.50, which is a psychological and Fibonacci resistance level, the downtrend will be broken.