The Swiss Franc posted its largest lost since the first week of August, as a strong US Dollar overpowered the foreign currency market. With the Greenback gaining over 170 points on the Swissie, the USDCHF finished at Sf 1.2470 by Fridays close.
With a Swiss National Bank interest rate decision on Thursday, this week may prove critical to the performance of Swiss Franc in the medium term. Analysts widely expect that the SNB will move to boost rates by 25 basis points in its coming meeting, with perhaps a further hike at its December announcement. Thus given that the rate change is arguably priced in to current exchange rates, it will be more important to monitor the statement to accompany the news release. With a tight labor market and solid economic growth, it serves to reason that the central bank will do more monetary policy tightening by years end. Despite the fact that it meets only once per quarter, however, the fact that inflation remains low gives the SNB little reason to raise rates by more than a quarter percentage point at a time. We will nonetheless monitor officials statements to assess whether the bank remains hawkish or dovish on the future of monetary policy. If markets perceive weakness in the SNBs resolve to combat inflation, there could be further declines for the Swiss Franc. If, on the other hand, bank officials take a more hawkish stance and hint at the possibility of a 50bp hike in December, we will likely see the CHF gain against other major currencies. The upcoming Producer Price inflation release may shed some further light on the need for monetary policy changes. With the monthly figure expected to edge slightly higher, an annualized 2.9% producer inflation rate currently presents relatively little threat to price stability. As such, we will watch for any signs that inflationary risks are on the rise.
This past week saw the Swissie lose 1.4% against the Dollar, as lower than expected national growth only compounded the Greenbacks recent rally. Indeed, second quarter GDP gained an annualized 3.2% versus consensus estimates of 3.3%, while first quarter figures were revised down from 3.5% to 3.2%. The release only served to bolster the USDCHF further, as the US Dollar otherwise posted the fourth day of strong gains as reflected in the Dollar Index. Earlier in the week, Swiss CPI fell right in line with expectations of 1.5% annualized growth. Despite Fridays report showing the lowest unemployment in three years, consumer demand does not seem strong enough to allow prices to match higher producer input costs. Whether CPI can edge higher has and will continue to be a contentious issue, as current levels arguably leave the Swiss National Bank to raise interest rate targets. The coming PPI report should shed more light on inflationary pressures for the Swiss Economy, but the SNB is in a comfortable position overseeing robust economic growth with low inflation.
