We had to wait three whole months for the Swiss National Bank (SNB) to make its monetary policy assessment. So what did we learn from the central bank’s announcement?
Well, we can say that we learned at least two things:
1. Even Switzerland is having a hard time.
It’s one of the richest countries in the world in terms of per capita income, but even Switzerland has been having a tough time lately. The second quarter of 2012 was particularly painful for Switzerland as it saw its economy unexpectedly contract by 0.1%.
But according to the SNB, the ride won’t be getting any smoother any time soon. Swiss policymakers believe Switzerland will still face considerable headwinds in the near term, which is why they downgraded their growth forecasts for 2012 from 1.5% to just 1.0%.
In its monetary policy assessment, the central bank sounded pretty concerned about the threats that the euro debt crisis and global economic slowdown present to its economy. It claims that these external problems are really dragging down Switzerland’s growth prospects. Bummer, dude!
To make matters worse, there are dangers on the domestic front as well, as reported by the central bank. For one, Switzerland still has a lot of excess production capacity. The Swiss factory PMI has failed to post a reading above 50.0 for five straight months now, suggesting a real problem in the manufacturing sector.
In addition, Switzerland still hasn’t shaken off threats of deflation. In fact, the SNB sees the inflation rate clocking in at -0.6% this year, which is even lower than its June forecast of -0.5%.
2. The euro’s strength is legit.
It wasn’t so much the SNB’s announcement that convinced me that the euro’s strength is the real deal. Rather, it was the market’s reaction to the event that opened my eyes.
As you can see in the chart above, EUR/CHF didn’t drop like a hot potato after the SNB had announced that it would maintain the minimum exchange rate at 1.2000.
The way I see it, this tells us one thing: that the pair were being propped up by more than mere speculation that the central bank would raise the floor on EUR/CHF. It was legitimate euro strength that was keeping it above 1.2000!
If you really think about it, in a weird sort of way, the market’s reaction proved that the SNB made the right decision. With risk appetite up and demand for the euro being boosted by developments in the eurozone and QE3, there’s no current need to raise the floor on EUR/CHF.
That the pair is now comfortably trading above 1.2100 suggests that even the markets agree that the franc is overvalued at 1.2000… at least for now!