Fundamental Forecast for Swiss Franc: Neutral

- Consumer prices rose 1.0% from a year earlier, but declined 0.1% in December
- Retail sales in December jumped 4.7% following a 0.1% decline the month prior
- The Swiss unemployment rate rose more than expected to 4.6% from 4.4%

Two more warning shots from the SNB failed to drive the EUR/CHF higher but have kept the pair trading above 1.4650. The central bank is suspected to have intervened in the currency market in order to depreciate the local currency against that of its main trading partner as they look to drive demand for exports. Policy makers also fear that a strong franc will continue to import deflationary forces, as was seen in December when consumer prices fell 0.1% on the month. On an annualized basis inflation actually rose by 1.0% which surpassed estimates of 0.8% as transportation and energy cost continue to rise. However, a 0.7% drop in core prices in December will only strengthen the SNB’s conviction to keep their pledge to limit Franc appreciation. The Franc also ended the week even against the greenback despite considerable volatility driven by broader risk trends.

Domestic growth showed signs of improvement with retail sales jumping 4.7% in December following a 0.1% decline the month prior. The improvement in consumption could be short lived as unemployment rose to 4.6% from 4.4% in January. Companies remain reluctant to add to their payrolls as they fear downside risks to growth remain, which was reinforced by Euro-Zone 4Q GDP rising only 0.1%. The sovereign debt issues in Greece, Spain and Portugal should only increase concerns over the region’s stability. The Euro remains under pressure and its continued depreciation will make the SNB’s goal of franc deprecation a monumental task. Despite the might of a sovereign central bank it is no match for the broader market. Europe’s troubles could potentially cause a panic and a sharp selloff of the single currency.

This week’s fundamental calendar will like most week’s present very little in the form of event risk. However, the upcoming producer % import price trade balance reports will provide insights into domestic growth and inflation. The combined price reading fell 2.5% in December and is expected to have dropped another 1.5% in January. Despite further evidence of potential deflation, we may not see any action from the SNB as the country’s markets close for Carnival.

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