Fundamental Forecast for Swiss Franc: Neutral

- Swiss Franc Speculative Sentiment Hits Extreme Levels Against US Dollar
- Unemployment Rate Surges to 4% in August, Highest in Six Years

The Swiss Franc may see heavy volatility in the week ahead as the Swiss National Bank gets set to announce monetary policy. As with most major central banks, there is little doubt that the SNB will leave benchmark interest rates unchanged. Rather, traders will focus on any updates to policymakers’ commitment to keep a lid on the value of the Swiss Franc with direct intervention into the currency markets. Consumer prices printed a bit better in August, rebounding from the low set in July, and expectations of a similar moderation in Producer Prices foreshadow slightly better results for the headline inflation gauge in the months ahead. Still, it is surely much too early to say that the specter of deflation has dissipated, so the SNB is unlikely to do a complete about-face on exchange rate policy. To that effect, the markets will look for a more nuanced hint at the bank’s bias going forward, such as an upward revision of inflation expectations. The 1.50 level in EURCHF seems to have been the threshold of the SNB’s comfort zone, and traders would be wise to watch the behavior of the cross vis-à-vis this juncture ahead of the policy announcement.

Also of note on the economic calendar, Industrial Production is set to shrink at an annual pace of -11.1% in the second quarter, the most in at least 18 years. This is quite telling: manufactured goods top the list of Swiss export commodities, so the drop in industrial output is indicative not only of a sagging domestic economy but of lackluster demand in key overseas markets. The top three Euro Zone economies alone account for close to 50% of Swiss export demand; considering EURCHF has been trading sideways in a fairly narrow range since the SNB took hold of the exchange rate in mid-March and therefore is unlikely to have significantly impacted European preferences for Swiss-made products, it would seem that the forthcoming Industrial Production figures stand in contrast of the surface-level improvements in second-quarter GDP readings out of the Euro area. For our part, we have long argued that the apparent stabilization in the region owes primarily to fiscal stimulus and the inventory cycle, both of which are inherently limited in scope and therefore incapable of supporting a sustained recovery in private demand.

Rounding out the docket, Retail Sales are set to rise 0.7% in the year to July, a reading slightly lower than the previous month’s 0.9% result. On balance, sales have been trending lower since the beginning of last year and this reading falls firmly along that trajectory. September’s edition of the ZEW Survey of investor sentiment is also due for release.

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