|
|
Currency Forecast
USD/CHF Outlook
The budding Swiss recovery of 2005 accelerated in Q1 of 2006 as tiny, staid Switzerland emerged as the fastest growing major economy in Europe. Low unemployment, improving consumer sentiment, and a lower franc, which spurred the growth of the nations export sector, have all combined to produce stellar economic results. Switzerland continued to record healthy GDP growth of 2.8% in Q1 while the countys most important economic statisticthe KOF index of economic indicatorshas risen to its highest level since 2000 for two consecutive months. The currencys Achilles heelits ultra low repo rate of only 1% was its one weakness in Q1 as interest rate differentials made the Swissie vulnerable to carry trade flows, especially against the dollar where the spread increased to 375 basis points. Therefore, while Switzerland is a model of political stability and steady economic growth, the franc may continue to see pressure due to concerns about interest rate differentials. Nevertheless, if the Swiss economy continues to perform as well in the second half of 2006 as it has in the first, the growth rate differentials should begin to favour the franc especially against its much larger next door neighbor.
Peace and Prosperity But No Boost From Gold
Although Switzerland continues to retain its status as the safe haven destination for worlds capital in times of geopolitical stress, the countrys currency is no longer strongly correlated with that other great safe haven assetgold. At one time, the currency was 40% backed by the yellow metal but in 2005, the Swiss government sold the nations vast inventory of gold and returned the funds to the countrys cantons. As a result, the Swissie has not benefited from Golds recent rise above the $600 level for the first time in 25 years. Furthermore, given the decoupling that began in 2005, further gains in gold may not produce any additional strength in the Swissie as the currency will most likely trade strictly off its economic fundamentals. However, should the geo-political situation deteriorate significantly, especially a US confrontation with Iran regarding its nuclear development program escalates beyond mere rhetoric, the Swissie may well see massive inflows as panicked investors seek the safety and stability of the worlds most neutral nation.
Strong Growth Continues
The beginning of 2006 continued to show marked divergence between the anemic economic growth of the European Union and the almost torrid pace of expansion of much smaller but far more nimble Switzerland. With unemployment hovering at an ultra-low 3.8% and Retail Sales racking up a healthy 3.1% year-over-year gains, Switzerlands growth remains on the fast track. The engine that is leading the economy forward is the countrys vital export sector, which has benefited mightily from the relatively low exchange rates of the franc to the dollar. The most recent reading of the SVME Purchasing Manager Index soared to 60.0, far higher than the 58.1 projected and far higher than the 50 boom/bust level. The manufacturing data suggests that global demand for Swiss products remains buoyant, which will likely lead to further job gains and stronger consumer spending in months ahead.
Inflation AbsentWill SNB Hike?
One of the greater ironies of the FX trading in Q1 of 2006 was the fact that while Swiss economic growth far exceeded its nearest rivals, the Swiss franc itself underperformed both the euro and the pound. The primary reason for the weakness in the currency was the diverging interest rate expectations amongst market participants. While growth in Switzerland continued to percolate, inflation was contained, registering a very modest 1.4% year-on-year gain. The low inflation in combination with persistent trade and fiscal budget surpluses has provided the SNB with the luxury of not having to raise interest rates. As expected, the SNB raised rates by 25 basis points to 1.25% on March 18th 2006, but SNB President Roth remained coy about the pace of future rate hikes, stating only that the Swiss monetary authorities would pursue gradual adjustment. As a result, the unit continued to lag the euro as questions of whether the SNB will match the ECB hike for hike remained in traders minds.
Conclusion
Although the Swiss franc is no longer tied to gold, it remains the predominant store of safe haven value, and if the global geo-political situation in 2006 becomes volatile, especially in light of escalating tensions with Iran, the franc may attract capital as investors seek safety in its stability. However, as 2006 moves forward, the unit may not only benefit from its traditional role as a safe haven refuge but may rise on economic merits as well. If Switzerland is able to sustain the strong economic growth record as the year progresses, traders and investors may begin to flock to the unit on fundamental grounds. Despite low inflation, higher growth rates may spur the SNB to become far more aggressive in its monetary policy. Some analysts predict that the franc may yield 2% by the end of 2006, as the bank raises rates every quarter by 25 basis points. If such a scenario does unfold, the Swissie should perform well not only against the dollar, but also against the other majors as it would compress the interest rate differential against the euro and the pound and expand the carry spread against the yen to a meaningful 200 basis points. Thus for tactical traders in 2006, the Swissie presents interesting potential for profit on the crosses as well as against the dollar.
Technical Outlook
With the exception of a dip to the 1.2500 level at the start of the year, USD/CHF spent the better part of Q1 trading tightly within the 1.3200-1.2900 zone. The price action has become progressively narrower as ranges have compressed to a near standstill. The pair has traced an unmistakable symmetrical triangle that looks ready to explode. One of the more interesting properties of the symmetrical triangle formation is that it is neutral in terms of direction, offering equal probability of price action resolving to the upside or the downside. With USD/CHF closely correlated to the dollar index, the directionality of the pair may provide clues to the overall dollar trend in 2006.
At present, the technical situation in USD/CHF appears unclear with equal likelihood of price action moving higher or lower. Indicators provide little guidance as MACD remains at a standstill, hugging the 0 line. However, slow stochastic is beginning to form a lower high, suggesting a possible move to the downside. Should the pair trade in that direction, the nearest support comes in the 1.2678-1.2578 region bounded by a series of lows from Q4 of 2005 and the spike low of 1/23/06. Further support does not exist until fully 300 points lower at 1.2385 low of 9/05/05. On the other hand, should the pair break to the upside, it will run into a wall at the 1.3200 level which has formed a massive distribution top after three attempts to penetrate it. Should the pair overcome that barrier, the path is clear all the way to the 1.3700 figurea price level that has not been seen in the USD/CHF since 2003.
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
 FXCM Awards |
|
|
|
|
|
 Inc. 500
America’s Fastest Growing Companies
Three Time Honoree
2004, 2005, 2006
Best Retail Platform 2004 E-FX Awards
FX Week
Best FX Specialist
- 2004 RCA
TASC Magazine
Best Currency Broker 2004, 2005
Shares Magazine
Best Currency Broker 2004
t2w Magazine
|
|
|
|
|
|
|
; void(0);)
