EUR/CHF Forecast Dec. 15, 2011, Fundamental Analysis

The EUR/CHF was stable on Wednesday despite the strong euro weakness ahead of the rate decision on Thursday as expectations are slimming for a surprise by the SNB this meeting despite the discouraging data from Switzerland and accordingly the sharp upside move will be delayed and the pair will continue to trend lower in its tight bearish biased range unless the SNB surprises us indeed.

The franc was affected by the ZEW report as the ZEW Economic Expectations index, a gauge of investor confidence, dropped to minus 72.0 this month from minus 64.3 last month, while the measure of analysts’ assessment slipped to -20 versus the prior -4.8, adding to worries that the economy’s growth pace is easing further.

Other data from Switzerland showed that producer and import prices index for November dropped by 0.8% from the previous drop of 0.2%, while the annual index also dropped by 2.4% from the previous drop of 1.8%; however, the news did not have a remarkable impact on the pair’s movements despite the rising deflation threats that might force the SNB to move.

Despite the drop in prices and ease in growth, expectations are in favor of seeing a hold in the SNB’s monetary policy as policy makers will keep interest rate at 0.00% and not pushing it down to negative while keeping the cap of the franc against the euro at 1.20 as they will probably wait and see the development of the situation in the euro area.

Last week, that Swiss consumer prices dropped 0.5% from a year earlier, marking the sharpest drop since Oct. 2009, while Finance Minister Eveline Widmer-Schlumpf said negative interest rates and capital controls “are issues which are being examined.”

The Swiss government lowered 2012 growth forecasts on Tuesday, where the economy is expected now to grow 0.5% compared with the previous forecast of 0.9% as the escalating debt crisis forced downside pressures on Switzerland,

It is a critical day for Switzerland and the data will start with the Industrial Production for the third quarter at 08:15 GMT which is expected with a steep retreat and to record a drop of 0.9% after 3.6% rise the previous quarter and on the year to remain flat after a rise of 2.3%.

The more critical event will be at 08:30 GMT with the SNB Three-Month Libor Target which is expected to be held steady near its zero level yet eyes will be on the bank for any movement or even comments on any coming step to fight deflation and prevent the economy from drastically worsening amid the escalating market tension and uncertainty over the outlook.

As for the euro area, the start will be with the ECB December report at 09:00 GMT following on the decisions taken by the bank last week to lower rates and increase the liquidity to support faltering growth.

Also at 09:00 GMT the flash PMI estimate for November is due, where we are likely to see ongoing contraction across key euro area sectors after the contraction recorded in November with the index below 50, where the manufacturing PMI in November was 46.4 and the services at 47.5.

The CPI index is also due at the same time for November and inflation probably held at 3.0% inline the flash estimate.

The Employment Index for the third quarter is also due and likely to have deteriorated as we have witnessed the broad slowing in employment with faltering growth.