USD/CHF: Greenback Looks to Weaken Against the Franc

The US dollar extends its downtrend with the Swiss franc today following a short-term consolidation from the steep drop yesterday. Trader sentiment for the Dollar-Franc has been propelled by movements in the stock markets recently. However, looming automatic government spending cuts in the US pose a threat to the Dollar, while the Franc looks to gain from economic data across the Atlantic.

The world’s largest economy could take a big hit from automatic government spending cuts even if Congress only leaves them in place for a month or two. The Congressional Budget Office said on Tuesday the cuts would translate into $42 Billion less in federal spending between the beginning of March and the end of September. Congress has been scrambling to find a way to postpone the budget cuts, but has shown little sign of progress. In its report this week, the CBO projected that the economy would grow 1.4 percent this year if the austerity measures kick in. At that pace, the jobless rate would average 8 percent in the fourth quarter, just above the 7.9 percent reading from January.

On the other hand, the Swiss National Bank’s foreign exchange reserves fell for the fourth consecutive month in January, as the Franc pulled away from the 1.20 per Euro limit the central bank imposed in September 2011. The SNB held 427.049 Billion Swiss francs in foreign currency at the end of January, compared with a revised 427.196 Billion for December. With sentiment in the Euro Zone improving gradually, there is an ease in pressure on the SNB to step in and defend the 1.20 limit.

Further, Spain’s Treasury issued 4.6 Billion Euros of debt earlier today in a triple bond sale. Yields were higher on the shorter-dated paper from previous auctions a month earlier, as debt issue reached above the top end of the target range.

The Greenback is in for more bearish pressure today as trades favor the Franc, which suggests a sell bias for the USDCHF. Nevertheless, it is pertinent to look out for price appreciation from likely technical corrections on the currency pair’s movement.

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