Euro and Swiss franc Outlook

As the European debt crisis reemerged as a central driver of the foreign exchange market in early November 2010, the euro slumped more than 10% against the Swiss franc. Given the size of the Swiss capital markets, global funds managers typically do not have large exposure in Switzerland. Many of the world class Swiss companies have duel listings and/available on an ADR or GDR basis. Yet performance the Swiss franc is important as many have seen it as fulfilling the function that the German mark used to play before its steel was mixed with some weaker alloys. We suspect the story is more complicated that that, as the SNB proved mostly ineffective in stemming the Swiss franc's appreciation despite massive intervention and quantitative easing. Also, given that the Swiss current account surplus is driven by its investment income account rather than the trade account, meaning that the impact of the franc's appreciation on exports is somewhat less significant.

Fundamentally, the story is that the pendulum of market psychology has swung back toward a more optimistic assessment about European policy makers. Running low on periphery countries, which may serve as the forward defense of the the core, European leaders may sense that their collective back is against the wall. Officials are making the right noises ahead of next week's finance ministers' meeting.

This has helped take the pressure off the euro in general after the shellacking it took last week. A move now about $1.3150 signals a further advance that could push it toward $1.33 in the coming days. Against the Swiss franc,t he euro appears to have carved out a head and shoulders bottom pattern. Recal that a head and shoulders pattern is really a derivative of a triple bottom pattern and some skilled in the dark arts of

technical analysis may suggest it is really a triple bottom near CHF1.24.

Regardless the objective of the pattern is near CHF1.30, which is near the 50% retracement objective of the slide since late Dec when the euro was worth closer to CHF1.37.

This dovetails nicely with the stepped up SNB rhetoric. And was seen to be the case last year, as perverse as it may seem, well timed jaw boning, coupled with some supportive economic data--may be more effective than material intervention.