Starting off the week, USD/CHF looked poised to head lower and test the area under 1.2300, but a sharp turn at the mark coinciding with a weaker than expected KOF release abruptly set off a USD rally which has since left the Swissie down 145 points to close out the week at 1.2506. Leading into next week, more Swissie bearishness could be on the horizon with the trend likely to continue as market participants now view the SNB as having little taste to hike rates over another 25 basis points.
The week ahead could possibly extend losses and selling pressure on the Swissie as SVME-Purchasing Managers Index is expected to fall to 65.5 from Augusts high of 68.2, which should highlight that robust and expansive growth is at least starting to slow and may very well have peaked. Swiss Q2 GDP continued to rise in Q2 at 0.7% QoQ and 3.2% annual, which is very healthy and indicative of a robust and booming economy. However, gradual turndowns in figures like PMI could find economic growth in the second half of 2006 less expansionary. Also on the agenda, headline inflation, as indicated by Swiss CPI, is expected to soften to 1.1% from 1.5%, which is far below the SNB target rate of 2% and should give the central bank opportunity to patient wait and decide as to the timing of future interest rate hikes. Wrapping up the week will be unemployment data, which is anticipated to hold steady at a seasonally adjusted 3.3% as the labor market continues to show a steady firming despite rising producer costs.
Price action last week was almost completely determined by the KOF leading indicator which is one of the most important economic signals out of Switzerland. The KOF survey posted slightly weaker than expected at 2.32 versus consensus estimates of 2.42, marking the second month in a row of month over month declines. The index remains near multi year highs and is hardly considered a negative, but the deceleration of momentum bodes poorly for any Swissie bulls still counting on a 50 basis point hike from SNB. With very little reason to be aggressive on the rate front, the Swiss franc is likely to continue to suffer from interest rate differential disparity and will only rally if the outlook for global growth becomes markedly more defensive.
