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Market Analysis

Fundamental Analysis: Franc Weakening as Trade Talks Continue

February 25, 2019
BY Michael Stark

The Swiss franc has made ongoing losses since the end of last week against most major currencies. The move downward by the franc comes mainly after positivity in Sino-American trade talks. However, slightly disappointing data has also played a role.

Volatility has marked USDCHF since last week when this symbol first moved back below the critical support of 1.0000. The euro and the pound however have had more clear directions upward against the franc. EURCHF remains above Fr.1.135 and the pound has been testing Fr.1.31 today.

Trade talks and shares affecting havens

The weekend’s biggest news for the franc was Donald Trump delaying higher tariffs on Chinese goods. The main reason for trade talks having such a big effect on CHF is the status as a ‘haven’ for the Swiss currency. The franc is said to hold its value well even in times of higher political and economic uncertainty.

President Trump’s unspecified period of delay is for the tariffs originally due on 1 March, this Friday. Increasing the current 10% tariffs on around $200 billion worth of Chinese goods to 25% would have been very negative for global stock markets, so a delay is welcome for many symbols. Meanwhile, markets digested consistently positive remarks from negotiators taking part in last week’s talks. Most major indices are up today as a result of the news from Washington and Mr Trump.

Last week’s data was on the whole negative for the franc. The Swiss trade surplus declined somewhat to about Fr.1.39 billion, the smallest since September last year. Then this morning’s figures on Switzerland’s employment level were very slightly below expectations.

As is the case for the yen and krona, the franc’s rate differential with most majors is a strong fundamental against CHF. The SNB’s target rate of average -0.75% is the lowest of any central bank in the world. This usually acts as a powerful deterrent against any significant and sustained rally for CHF.

Tariff talks in view, but don’t forget data

The progress of talks in the USA aiming to resolve tariffs is probably the most important factor for the franc this week. More upbeat comments and maybe even a formal agreement would mean headwinds for CHF.

However, quite a few releases of data are due from Switzerland this week. Economic sentiment is expected on Wednesday at 09.00 GMT, then GDP growth around the same time on Thursday. Finally on Friday, markets await retail sales and manufacturing PMI. In each of these cases the likely focus of traders is whether a trend in the figures could be established.

Probably the most important release this week is the KOF Economic Barometer, due on Thursday at 08.00 GMT. The last result of this at 95 was a four-year record low, so a new low in business confidence this week would be a significant negative factor for CHF.

More small losses in view for CHF

Continuing reports of progress in trade talks is the biggest factor likely to skew fundamentals against the franc and other havens this week. As with any such event, though, and especially one involving President Trump, traders should always be prepared for a sudden change.

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