Fundamental Forecast for Swiss Franc: Bearish

- Swiss UBS May Consumption Indicator fell to 0.772 from 0.912, which was the lowest in five years
- SVME-PMI Index rose for July to 41.8 from 39.8, as orders increased
- Consumer prices fell for a fourth month by 1.0%, but less than the -1.1% expected

The Swiss Franc ended last week relatively unchanged after it fell after reaching an eight day high on prospective SNB intervention and broad based dollar strength. The Swiss National Bank Governing Board member Thomas Jordan said the central bank will continue to intervene on an ad-hoc basis to prevent the Swiss franc from rising, as part of its massive quantitative easing. We didn’t see any clear signs of intervention as we did the week prior when the USD/CHF rose nearly 400 pips on June 24th. Deflation concerns remain relevant for the central bank which was seen as consumer prices fell for a fourth month by 1.0%. A 4.4% decline in apparel costs underlines the weak demand domestic demand which has been generated by a declining labor market. Indeed, the UBS consumption indicator fell to a five year low of 0.772 in May, limiting optimism for future domestic growth. However, the SVME –PMI index rose for a fourth month as the back log of orders increased to 44.7 from 40.1 which is a monumental improvement from the 28.3 we saw in February. Output also rose to 48.8 from 43.7 as the export driven economy is seeing a pickup in demand as the global economy stabilizes.

The SNB will look to keep demand for Swiss products growing by continuing to keep its exchange rate lower versus its man trading partners Europe and the U.S. The recent increase in concerns over the scope of a global recovery which was heightened by the dismal U.S. Non-Farm payroll numbers could lead to businesses and consumers retrenching. This could impact demand making it more critical for the central bank to keep exchange rate slow. Therefore, more intervention is possible this week especially against the Euro if it starts to weaken on the back of increased risk aversion. The only release on the economic docket is the unemployment rat which is expected to return to 3.5% after a dip to 3.4% the month prior. The increased output in manufacturing hasn’t translated into demand for labor as the PMI employment component fell to 35.0 from 35.8. Companies will look to remain lean until they see firm signs that growth is returning.

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