Swiss Franc to Strengthen on Euro Zone Fiscal Crisis in 2011

http://www.dailyfx.com/forex/fundamental/article/special_report/2010/12/31/Swiss_Franc_to_Strengthen_on_Euro_Zone_Fiscal_Crisis_in_2011.html

The euro-zone sovereign debt crisis was one of the major stories of 2010, as investors fled the sixteen-member currency in search of refuge from the large budget deficits of Greece, Ireland, Spain, and Portugal. Although the U.S. dollar benefited from the euro-zone flight, gaining over 6.7 percent against the euro for the year, the main beneficiary of such outflows of capital was the Swiss Franc. The swissie has gained over 16 percent against the euro this year to a record high, while also setting fresh highs against the U.S. dollar and British Pound. Sentiment remains strong for the Swiss currency heading into 2011, as “options traders are more bullish on the franc for the next three months than any major currency except the yen,” according to Bloomberg News. The fundamentals for continued euro weakness also remain in place, as the EU is set to issue over 800 billion euros of new debt in 2011 according to analyst estimates. Portugal, possibly the next country in need of a bailout, will issue over 20 billion euros in bonds next year and may struggle to find a strong bid.

In addition to being a beneficiary of euro struggles, the Swiss franc has improved its global standing thanks to a growing economy with low unemployment. Swiss gross domestic product beat expectations for the third quarter, rising 0.7 percent QoQ, while the seasonally adjusted unemployment rate held at 3.6 percent in November, one of the lowest rates among mature economies. Furthermore, industrial production doubled expectations for the third quarter, rising 1.8 percent, while inflation remained anchored, as prices rose a modest 0.2 percent annually in November. The country still faces economic headwinds, however, and the rising franc could prove detrimental to companies in the coming year. According to SNB chairman Hildebrand, the franc’s “appreciation puts up the price of Swiss exports abroad or narrows the margins for Swiss exporters.” In fact, Swiss exports have declined significantly in two of the past three months and may force central bank intervention in the new year. The SNB aggressively intervened with the currency beginning in March 2009 to counter “excessive” gains, but this past June ended the policy.

Heading into 2011, struggles in the euro-zone should benefit the Swiss franc and may actually boost capital in the country’s banking system as investors move cash into Swiss banks. This should continue to boost confidence in the Swiss economy and spur growth, further strengthening the Swissie. One risk to investors long the Swiss franc would be positive news out of the euro zone regarding sovereign debt issues or economic growth, or a stronger-than-expected bid for euro-zone debt that would ease borrowing costs for the region’s governments. However, a strong EU resolution or increased investor interest in the euro-zone seems unlikely in near-term, making the Swissie a strong bet for the first half of 2011. The other risk to the Swissie may be intervention from its own central bank, but previous interventions this year have left a large overhang of liquidity in the economy and the SNB may be reluctant to further boost the M3 money supply which has increased at least 6 percent YoY in the last seven months. Therefore, if euro-zone struggles continue and the Federal Reserve continues its easy policies, look for investors to seek refuge in the Swiss franc this coming year.

EURCHF, Jan 2010- Dec 2010

Source: Bloomberg, Prepared by James Russell

Written by James Russell, DailyFX Research

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

http://www.dailyfx.com/forex/fundamental/article/special_report/2010/12/31/Swiss_Franc_to_Strengthen_on_Euro_Zone_Fiscal_Crisis_in_2011.html