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Currency Forecast: USD/CHF Outlook

Things Not Really Improving All That Much
Dampened by rising oil prices towards the end of 2004, Swiss economic growth prospects still remained under pressure in the first half of 2005. Things haven't improved all that much in Switzerland since our last report forcing the central bank to downgrade their real GDP growth estimates to 1.0% from 1.5% set in March. Reasons for the downgrade were three-fold. First, was the stagnant GDP growth in the first quarter over the previous three months due to a slack in exports. At the same time factors outside of Switzerland acted as a drag on the world economy. Oil proceeded to return to lofty levels in June after easing off of a record high in the previous two months. Exorbitant oil prices were particularly unfavorable for Europe , the biggest consumer of Swiss exports and finally, the level for uncertainty has increased overall since the Swiss National Bank's assessment back in March.

Looking at actual numbers itself, GDP growth was flat in the first quarter after contracting 0.1% in the fourth quarter of last year. Industrial production also contracted 6.5% in the Q1 with the purchasing managers index hovering just above the 50 contraction / expansion line. Inflation on both a producer and consumer level fell in May, leaving the higher trade balance as the only piece of good news.

Swiss Franc Benefits From Flight To Safety
Yet the Swiss Franc remains very strong as a result of flight to safety. The uncertainty in Europe has caused many holders of Euros to convert their assets to Swiss francs or Gold. Given that Switzerland currency use to be backed 40% by gold, the two now have an 80 to 90 percent positive correlation. The recent rally in Gold has helped to spur sharp gains in the Swiss franc against the euro.

SNB Prepared To Raise Rates
The Swiss National Bank continues to hold onto their unchanged neutral monetary policy but they remain ready to act if the economy improves. In June, SNB directorate member Hildebrand said that, "If the economy does recover, as we would expect it to do in the quarters to come, then the current monetary policy stance is not compatible with long-term price stability. We have room to be patient given our inflation forecast. There are a number of indications that suggest the recovery should proceed in the quarters to come, but as we pointed out today, the level of uncertainty is relatively high. Leading indicator developments in Switzerland [are] promising. We have PMI data suggesting the deterioration has ended...We also have credit data that suggest lending activities are increasing, not just on the real estate side, but also to businesses." So as you can see, even though growth has been weak, the SNB still retains a mildly hawkish bias.

Technical Outlook
The Swiss Franc has rallied significantly since the beginning of the year. The latest move by Swissie bears has pushed the pair above the trendline that supported the downward momentum for the past 4 years. Following a failure by the Swissie bulls to hold the 1.1300 figure and the break in the trendline, the 1.30 level is now in reach. A break back below 1.24 could see a move back down to 1.20. Meanwhile, stochastics are dipping below the overbought line at 73.44. ATR is rising pointing to growing volatility, and ADX (DMI) is at 38.84 indicating maturing trend.

Key Levels: The latest move by Swissie bears has pushed the pair above the trendline that supported the downward momentum for the past 4 years. Following a failure by the Swissie bulls to hold the 1.1300 figure and the break in the trendline, the 1.30 level is now in reach. A break back below 1.24 could see a move back down to 1.20. Enlarge Chart View
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