Special FX Report - CHF Continues To Rally Despite Weak Data
CHF traded sharply higher Monday supported by a surge in equity markets and G-20 pledge to continue stimulus. CHF continues to track risk sentiment shrugging off negative Swiss fundamental data. Swiss inflation continues to fall and the unemployment rate rose to an 11 year high. Swiss October CPI declined for the eight straight month and dropped by 0.8% y/y.The decline in Swiss CPI reflects the impact strong CHF, weak Swiss domestic demand and a drop in petroleum prices. Swiss Q2 GDP contracted by 0.3% and GDP is expected to have continued to contract in Q3. Month to month Swiss CPI rose 0.6% from a flat reading in September. The Swiss National Bank (SNB) expects CPI to fall by 0.5% in 2009 and begin to rise towards 0.6% in 2010 and 0.9% in 2011.The main risks to the SNB inflation outlook are strong CHF and rising Swiss unemployment. Strong CHF tightens liquidity and makes imports cheaper. Rising unemployment will reduce consumer demand.
(Source: SNB)
Swiss October unemployment rose to 4% from 3.9% last month. This marked the highest level for Swiss unemployment since 1998 and the report suggests that the Swiss economy has yet to emerge from recession. In October the SNB elected to hold rate policy unchanged at 0.00% to 0.75% pledged to continue to provide generous liquidity and reaffirmed its commitment to intervene decisively to combat CHF appreciation. The continued rise in Swiss unemployment and declining inflation could increase the risk of SNB intervention to try and stop CHF appreciation and may encourage the SNB to maintain record low yields for some time to come. The next SNB policy meeting is scheduled for December 10th.
(Source: SNB)
The SNB intervened in the EUR/CHF in March and there have been rumors that the SNB has recently intervened in the cross in defense of the 1.5100 level. EUR/CHF is currently trading near 1.5100. As the cross approach's this level the threat of SNB intervention will increase. SNB's Jordan will speak Tuesday in Zürich and Thursday in Geneva. The trade will be looking for comments from Jordan about the potential for intervention. In the past Jordan has been vocal about his concern about CHF strength and the prospect for SNB intervention. On Friday, October producer prices will be released expected at -4.9% y/y. The trade will look to the PPI for clues about the risk of deflation. The arrow in the graph below points to the impact of SNB intervention in March. Since the March intervention the EUR/ CHF cross has been remarkably stable. If the stability gives way and the cross breaks the 1.5000 level expect the SNB intervene. The SNB does not seem to be as concerned about CHF gains versus the USD.
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