The Swiss Franc reached 5-month lows on the week, as surprisingly neutral SNB commentary and falling Industrial Production only exacerbated recent US Dollar strength. A Friday rally in the USDCHF took the pair above Julys 1.2598 high, but a wave of pre-weekend profit taking allowed the unit to slip below the significant price level. The coming week will comparatively see less significant economic data for the Swiss Economy, but US news may dominate markets with important inflation and international monetary flows results.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Recent commentary from Swiss central bankers prompted sharp sell-offs in the domestic currency, as traders pared bets that the SNB would raise rates by 50 basis points in December. Indeed, synthetic forward rates now reflect a mere 20 percent chance of rates at 2.25 percent by the end of the 2006. The pronounced decline in the Swissie has subsequently left it deep into oversold territory. A clear sign of the times, Fridays IMM data showed that futures traders held the largest net short position in the Swiss Franc since April. Speculative short contracts outnumbered longs by a whopping 43,000 contracts. This could in fact suggest that the USDCHF may begin to form a top in coming weeks, much like it did in April following extreme positioning. We wait to see whether a bullish turn in coming data will allow the Swissie to regain strength.
Due to be released as early as Monday, Swiss officials will report on the annualized growth in retail sales. Though there are no economic estimates currently available, Swissie bulls hope that the economy can continue on its trend of strong growth in consumer spending. Given that unemployment is at its lowest since 2002, we may indeed see a boost in the overall figure for the month of July. Likewise to be released this week, trade monitors will divulge the national trade balance for the month of August. Traders will watch for continued export strength, but will likewise monitor the inflationary impact of growing imports. Indeed, import prices have continued to drive overall price levels higher and have likewise affected SNB inflation forecasts. If nominal imports growth matches the 7.8 percent seen in July, we may hear a slightly more hawkish tone from Swiss central bankers.
The past week of Swiss economic news saw an interest rate announcement and key commentary from SNB board member Philipp Hildebrand. Speaking earlier in the week, Hildebrand sparked a sell-off in the national currency when he said that national growth was likely past the peak in its cycle. Indeed, he said that slowing growth could tame inflation, reducing the need for changes in monetary policy. Perhaps unsurprisingly, official commentary following the SNB rate decision carried much the same tune, lowering expectations on the future of interest rate targets. As markets had widely anticipated, the bank raised their LIBOR target by 25 basis points to 1.75%. The following commentary caught many traders off guard, however, as officials downplayed the need to tighten rates to contain higher prices. Despite a greater than expected rise in Producer and Import Costs reported on Friday, Swissie bears carried momentum to take the currency to its 5 month lows. We will wait to see whether the coming weeks will produce a turn in sentiment, allowing the USDCHF to retrace against its recent gains.
