The Swiss franc began last week by pushing nearly 100 points to 1.2400 against the US dollar. However, with indicators dropping off and interest in the greenback rising, the trend stuttered and failed. By the weeks end, the pair retraced its original move, and then some, to the 1.2600 level.
The primary footing behind this run was the 350 basis point carry trade differential and the reassurance that it would remain intact at least until the SNB meets again in December. Next week could prove to be one that only a Swissie bear would appreciate, as there is absolutely no economic data set to be released.
The upcoming week sports no new economic data, so market participants expect the Swissie to trade primarily off of events already ripe within the market. The Swiss economy continues to take a not-unexpected breather as robust data from leading up through the previous two quarters shows some normalization in August and September, led by a disappointing KOF and lagging PMI data. Thus, there may be a limit to upside potential as the market should look to consolidate recent gains in the currency over the next week. Also affecting near-term Swissie price action should be the deterioration of the carry trade as the SNB continues on the path to rein in intolerable inflationary pressures. Currently sitting at 1.75 percent, the SNB has expressed its motives to continue hiking rates once more this year as long as growth continues to fall in line with expectations.
Price action last week primarily sought to validate the weak economic data expressed by Swissies most telling of report: the KOF Leading Indicator. The market found confirmation to this leading indicator as the September SVME Manufacturing PMI came in below market expectations at 64.4 versus 68.2 the month before. This was one more tool used by long swissie bulls to claim that the economy and its robust growth may very well have peaked. Selling ensued as market participants covered positions over fears the Swissie was overvalued, and they continued to unload for the remainder of the week. Accelerating this initial move, the consumer price index had also proven disappointing. Reporting a greater than expected 0.2 percent contraction versus a consensus of no change, reaching speculation of a potential 50 basis point hike was completely taken off the table while even the urgency behind another quarter point rate hike in December started to look questionable. Although another rate increase is widely expected in December, recent comments from SNB's Hildebrand which stated inflationary pressures seem much lower in the current recovery than in similar situations in previous years, and, The uncertainty about the potential growth rate and the level of neutral interest rate is rising from a monetary policy point of view, have put market participants on edge. After this week of dour news was fully distilled in the market, the currency pair closed 100 points higher at 1.2605, above both the 200-day moving average and resistance that has been in place since April.
