Switzerland Manufacturing PMI came in at 62.0 from 61.7 and 0.7 higher than expectations. This continued a strong trend of economic improvement in manufacturing reaching the highest level since 2011. Last week Kof leading indicators jumped to 109.1 from 105.8. With a weaker CHF and further improvement in global demand Switzerland is uniquely positioning to exploit the opportunity. This fact is clearly reflecting in the increased upside surprises. Interestingly and quietly consumer price inflations has been slowly creeping higher as annual headline read stands at 0.7%.
Should the current inflation trajectory continue prices should hit the SNB 2% target in early 2019. While a year away with Swiss GDP growth outlook improving above 0.9% 2017 trend, the central bank will be faced with interesting policy choices in 2018. Yet in the current environment, CHF remains a solid short against USD and EM currencies. Accelerating outflows and dropping FX hedge ratios will further weaken the CHF. But the key of an unmoving SNB unlikely to unwind reserves of adjust policy rates higher until CHF become less “overvalued” is the primary reason investors will shift out of CHF. We remain constructive on USDCHF expecting current bullish trend will extend to 1.02.
By Peter Rosenstreich
