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

On Wednesday trading, the pair showed a rise amid tensions in markets after the rise in Italian bond yield at auction and amid expectations the SNB would keep the cap at 1.20 and hold interest rate at 0.00%.

The pair continued its rise after it rose sharply on Tuesday following the Fed’s decision as policy makers kept interest rate at its ultra-low level of 0.25% and mentioned that the world’s no.1 economy will continue its expansion.

The pair, yet, continued to be driven more by the market sentiment where the main concentration is still on the world’s hot spot after last week’s EU summit; the Italian treasury sold 3 billion euros of five-year bonds in an auction that witnessed a decline in demand and rise in yield. The selling reached the maximum target with a demand of 1.42 times compared with 1.47 last month, while the yield edged up to 6.47% from 6.29% the previous auction.

Tensions increased as the Bank of Spain announced today that Spanish banks borrowed an average of 98 billion euros from the ECB in November, which is the highest in more than 12 months.

In addition, German Chancellor Angela Merkel refused raising the upper limit, which was expanded to 500 billion euros, for the European Stability Mechanism (ESM) which will become effective by mid 2012, according to two officials familiar with the discussions.

Regarding fundamentals, 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% form 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 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,

On Thursday, at 08:15 GMT, Switzerland will release industrial production for the third quarter; analysts are predicting 0.9% drop from the prior 3.6% advance. At the same time, the main attention will be on the SNB 3-month libor target rate.

For the US, eyes will be on a batch of US data including the release of PPI for Nov. at 13:30 GMT, where the annual reading excluding food and energy will be steady at 2.8%, according to median forecasts. At the same time, both empire manufacturing for Dec. and jobless claims report will be out. At 14:15 GMT, industrial production and capacity utilization for July will be out. Thereafter, particularly at 15:00 GMT, Philadelphia Fed will be available.