Who Moved My Swissy?

For the past month, it seems that the Swiss economy seems to be picking up slowly. A retail sales report indicated that sales rose from May to June by 0.9%, suggesting that consumer consumption may be picking up. Sentiment also seems to be improving amongst investors, analysts, and purchasing managers, as the ZEW Economic Expectations report printed a reading of 18.6 – a significant improvement from July’s reading of 0.0. At the same time, the latest SVME purchasing managers index posted a score of 50.2, the first time in 10 months that the index surpassed the 50 boom/bust point. Lastly, Swiss GDP fell much less than expected in the last quarter, sliding down by just 0.3%, after it was expected that it would fall by 0.9% from the 1st quarter to the 2nd quarter.

All of these upbeat economic readings gave the Swissy the fuel needed to stage a stellar performance against the Buck early in September. It opened the month at 1.0659 and is currently trading in the 1.0350 area. That’s already a 3.5% gain and we’re just halfway through the September! What’s going on here?!

Still, chalking price action to Swiss fundamentals alone would be… imprudent, in my opinion. Take a look at the EUR/CHF cross. Many experts look at this pair to gauge whether the SNB is planning something sneaky. It seems that traders are afraid to sell the pair as they fear currency intervention from the central bank. In fact, if you look at other majors, it is the dollar that is holding the short end of the stick as it has been sold off furiously versus most major currencies!

Are we really seeing a demand for the Swissy… or is the dollar really that unattractive? The truth of the matter is, more often than not, “experts” can only speculate why currencies act the way they act. Exchange rates are always relative. Whether it’s a CHF or a USD move, we can’t really pinpoint for certain! On one hand, it’s possible that there is a high demand for the CHF – otherwise there wouldn’t be any threats of currency intervention by the SNB, right?! On the other hand, currency traders may just be looking for alternatives to the US dollar, as showed be the dollar’s weakness across the board. Could it be both – who knows!?

Come Thursday, the SNB will release its Libor rate and monetary policy assessment. Just like most central banks, the SNB is expected to hold rates at their current level of 0.25% as economic growth remains unsteady.

Of greater interest is whether SNB policymakers will make additional efforts to curb the CHF’s recent gains. The SNB has been notorious for verbal currency intervention by announcing their plans to buy up Swiss bonds and purchase foreign currencies to weaken the Swiss Franc. With the intention of countering deflation and pumping up demand for their exports, the SNB verbally intervened in the currency market in March 2009 when the EURCHF slid to the 1.4600 mark. Some analysts also speculated that the SNB intervened last June when the pair touched the 1.5000 mark. Now that the EURCHF is again edging closer to the 1.5000 threshold, could another round of currency intervention be in the cards? It seems like the effects of their intervention efforts are short-lived, seeing that the EURCHF is sinking back to 1.5000 and the USDCHF down to 1.0350. With the effects of their currency interventions proving to be short-lived, will the SNB be more aggressive in their purchases of bonds and foreign currencies this time around?

Since the last verbal currency intervention, the EURCHF has gone up only by about a hundred pips to its present price… a far cry from the EURCHF moves we saw during the first and second quarters of the year. Versus the USD, the CHF even made headway and is now on its yearly high! Remember that in its last MPC meeting, the SNB announced that making the CHF weak through market intervention is one of their major policies. Hence, could we see another spike in trading IF the SNB starts waving its magic wand again? One thing is probable though… the Swissy could move come Thursday. The question is “Which way?”

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