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Swiss Producer Prices Fell 0.1% in July
Swiss producer prices declined 0.1% in July compared with expectations of a 0.2% monthly retreat with a 0.8% decline over the year from a decline of 1.0% recorded in the year to June. Domestic prices fell 0.5% over the year, while import prices fell 1.5%. The National Bank will maintain a steady policy in the short term with no increase in deflation fears.
Prices for domestic goods were unchanged on the month, while import prices declined 0.1%.
There was a decline in energy prices and watches in the latest monthly data with meat prices rising for the month.
Although the National Bank still considers the Swiss franc to be considerably overvalued, the latest inflation data has been slightly better than expected with the consumer inflation rate at -0.2% in the latest release from -0.4% previously.
The producer prices data does not suggest that deflationary pressures will intensify in the short term, although there is also little evidence of any increase in inflation.
The National Bank will be uneasy over the continuing impact of negative interest rates given the risk of bubbles in the property sector and damage to the banking sector. Although there will be relief that inflation data will not increase pressure for further monetary easing to weaken the Swiss currency, very low global rates will make it very difficult to tighten policy in the short term.
Market reaction was very limited with EUR/CHF fractionally higher at 1.0885 with USD/CHF unchanged at 0.9745.
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Swiss Economic Expectations Worsen Further in August: ZEW
Switzerland's economy entered the eight month of the year with a lowered growth outlook, according to the survey released on Wednesday.
The Credit Swiss ZEW index, which gauges survey participants' expectations for the Swiss economy over the next six months, fell to minus 2.8 points during August, compared to the 5.9 snatched in July.
Back then, it sharply dropped from its best reading since February 2014.
The index measures the difference between business expectations for improvement or deterioration in the Swiss economy.
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Switzerland trade balance July +CHF 2.93bln vs +CHF 3.51bln prev
Swiss July trade balance report 23 Aug 2016
'Overvalued' Swiss Franc seen as Prime Suspect in Slump of Swiss Watch Exports
Export figures show a sharp fall in one of Switzerland’s key exports: timepieces, and the strong Swiss Franc is taking a good portion of the blame. However, the post-Brexit UK market offers one spot of brightness for the industry.
Here is an example of why many countries dread having a stronger exchange rate.
The seemingly unassailable strength of the Swiss Franc was highlighted once again, when recent export data showed a -14.2% drop, year-on-year, in watch exports in July, according to official figures from the Federation of the Swiss Watch Industry.
The increasing strength of the Franc has made Swiss exports even more expensive, reducing their appeal to a global market.
“The reason why demand is being pushed lower is largely due to an overvalued Franc, which is unfortunate for manufacturers as we will not see any pick-up in demand as long as the currency remains so strong,” says Swissquote Bank’s Peter Rosenstreich.
The largest declines in Swiss Watch exports were to Hong Kong which fell by -32.7% - the 18th consecutive month of declines - and in Europe, especially France, which saw a fall of -27.8%.
The reduction in French sales was put down to the Paris terror attacks which impacted on tourism, especially from rich Asian travellers.
Declines were noted amongst all price brackets, but especially the high end, above 3000 francs, and very low end, below 200 francs.
Rosentreich noted that there was a silver lining in the Franc being so strong, which was the positive trade balance, “even though it declined to CHF 2.93 billion from CHF 3.55 billion.”
The analyst ended the article, arguing the fall in exports meant, “there will be increased calls for the Swiss National Bank to defend the CHF.”
Much like many other major central banks, however, the SNB appears to be, “running out of options,” and they have, “already exhausted many policy tools,” said the analyst.
Switzerland is already one of the few countries in the world which has negative interest rates, which currently stand at -0.75%; and have been negative since early 2015.
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USD/CHF Weekly Outlook August 29-September 2
USD/CHF surged higher in this past week as the Swiss Franc was the weakest performer among the majors. The currency pair has gained 1.85% for the week and has nearly erased losses from the prior two weeks.
While some of the majors fell into a range ahead of Janet Yellen’s speech on Friday, USD/CHF posted steady gains following a minor pullback in the early week, as the Swiss Franc gave up losses against all of its counterparts.
A notable break was seen among the cross rates as EUR/CHF broke through a declining trendline from mid-July highs. A bullish technical pattern is also evident in GBP/CHF as the pair has posted a morning star reversal candlestick pattern on the weekly chart.
USD/CHF gained momentum in the recovery on Friday, as Janet Yellen’s speech triggered broad-based US Dollar strength. In her opening remarks, Yellen commented that the Fed is approaching their goals of maximum employment and price stability, mirroring what Fed Vice President Fischer said in his speech last weekend. The Fed chair went further to say that a case could be made for a rate hike following improvements in the labor markets in recent months, and a promising outlook for economic activity and inflation. Previous concerns over Brexit were not mentioned, adding to the hawkish nature of the speech.
The futures markets are pricing the highest probability of a rate hike since the EU referendum, following Yellen’s speech. End of year probabilities of a rate increase is now seen at 59.1%, up from 46.2% at the start of the week.
Positioning in the Swiss Franc continues to remain neutral, despite a strong correlation with the Euro, and heavy short positioning in the currency. The COT report shows non-commercials holding a $245mn net long position in the pair, reflecting the smallest net long held among the majors. US Dollar positioning was decreased by a considerable size in the week to August 23. The net long position dropped by $3.95bn to $7.18bn, leaving the Dollar vulnerable in the week to come as market participants will likely look to rebuild long positions following Yellen’s remarks.
Fluctuations in the US Dollar are likely to continue dominating the majors in the week ahead, as data closely related to the Fed’s dual target mandate will be released. On Monday, PCE price index figures stand to move the Dollar if the number moves closer to the Fed target of 2%. The prior reading for the annual figure came in at 1.6%. Friday’s NFP numbers are expected at 186,000 and a print near or above expectations will drive up expectations of a near-term rate hike. With market optimism for a near-term rate increase already at high levels, the US Dollar will be extremely sensitive to both data releases.
While bullish sentiment towards the Dollar is quite likely in the upcoming week, USD/CHF faces significant overhead resistance. The rally on Friday has taken the pair to the 0.9786 resistance level. The level has been influential in the pair for several years, and multiple reversals have been seen from the price point cause both bullish and bearish turns. Above the resistance level, the 200 period daily moving average comes into play around the 0.9830 level, while a declining trendline is seen around the 0.9850 mark. The declining trendline can be seen on a daily chart, and dates back to highs from November. The pair last touched the trendline in late July, and the subsequent decline resulted in a loss of nearly 400 points. A catalyst would be required for a bullish break of the trendline, and both the PCE price index numbers and NFP figures carry the potential for a break. The trendline will be closely watched in the upcoming week, as a break would have bullish implications in the medium to long-term.
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USD/CHF Pauses Ahead of Long-Term Resistance
Following six consecutive daily gains USD/CHF is seen consolidating below a level that has shown a significance in the pair for several years. While the weekly chart posted a bullish engulfing candle in the prior week, setting a bullish tone, the smaller time frames are providing an early indication of a possible pullback.
The pair was seen rallying up to the strong resistance level found at 0.9786 on Friday and settled slightly lower to close out the week. Another attempt at the level was made at the European open but resulted in a spike on a 1-hour chart. A break higher was seen during early North American trading, but once again, gains were not sustained as the pair is seen dropping below the level. The pair traded above the level during today’s US data release, data came in line with expectations, but failed to trigger a broader rally for the Greenback.
Personal income was reported to increase 0.4% in July, while personal spending rose 0.3%. The PCE price index rose 0.1% in July on a monthly basis and remained unchanged at 1.6% on an annual basis. The in-line data failed to trigger optimism in a near-term rate hike, causing a range for the US Dollar followed by a consolidating lower in the late day.
USD/CHF faces significant overhead resistance in the early week as a 61.8% Fibonacci retracement from late July highs, the 200 period daily moving average, the horizontal resistance at 0.9786, as well as a declining trendline from November highs all come into a play in a 100 point range above current levels. A bullish catalyst is likely required for a sustained push higher in the pair, and Friday’s NFP data is the most likely risk event seen on the economic calendar to provide such a catalyst.
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USD/CHF: Weekly Outlook for September 5-September 9
In last week’s trading, USD/CHF initially followed through on August 26th’s advance, which was sparked by dollar strength in reaction to comments from Federal Reserve officials regarding the potential for rate hikes in the U.S. before the end of the year. However, signs of hesitation developed on Wednesday, with the pair forming a doji candlestick pattern, then USD/CHF experienced a downside reversal as the dollar fell sharply Thursday in reaction to a surprise read on U.S. manufacturing data. ISM Manufacturing missed estimates, coming in at 49.4 versus a forecast of 52 and a previous reading of 52.6 in July. The slip back into contraction mode with a reading below 50 is perceived as a negative for third quarter GDP growth prospects and left the prospects for a U.S. rate hike in question.
The case for a U.S. interest rate increase was muddled further on Friday, when U.S. nonfarm payrolls came in weaker than expected at +151K, versus a consensus estimate 180K. While the dollar initially plunged on the news, resulting in a decline to a new low for the week in USD/CHF, the greenback showed resilience, bouncing back and ending Friday’s session with a gain. Although USD/CHF fell short of ending Friday’s session higher, the pair did end the day well off the lows and back above initial support. With a close at 0.9786, the pair was down 0.13% on the day and up 0.15% for the week overall.
As a result of last week’s trading, new initial first support and resistance have been established, with support at Friday’s 0.9738 low. The pair’s 100-day moving average provides added confirmation to this level, as does the 38.2% Fibonacci retracement of the mid-August/early Sept. advance.
On the upside, the spike high established Thursday represents first resistance. This high also represents a test of a falling trendline dating back to Nov. 2015, as shown on the weekly chart. A break above this trendline would be a positive development regarding the longer term outlook for the pair. Such a move would also confirm a breakout from the narrowing pattern that has defined price action for the past several months, also shown on the weekly chart, as well as the pair’s 200-day moving average. Thus, USD/CHF appears to be at a critical juncture, as further upside price action would have important positive implications for the technicals, turning the longer term outlook for the pair from its current neutral stance to positive.
The pair is not overbought on a weekly basis. Thus, there should be room to move on the upside next week. Overbought conditions on the daily chart have mitigated slightly, but should not prove to be a barrier when the underlying trend is strong. Thus, the current bias in USD/CHF is to the upside, with a break above the aforementioned resistance levels leading to a retest and potential break above key overhead at the 0.9950 level, which was tested and failed in both May and July.
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Swiss central bank to keep monetary policy on hold next week: Reuters poll
witzerland's central bank is expected to stick to its script of negative interest rates and a commitment to foreign currency interventions when it gives its latest monetary policy update next week, a Reuters poll found.
Despite improving economic developments and mounting criticism of its negative rates, the Swiss National Bank will keep the tools it has deployed since January 2015 when it scrapped its policy of limiting the franc at 1.20 to the euro.
All but two of the 31 economists polled by Reuters expect the SNB on Sept. 15 to keep its target range for the three month London Interbank Offered Rate at -1.25 percent to -0.25 percent, while all but one expected it to retain a negative rate of 0.75 percent on deposits it holds for commercial banks above a certain threshold.
The measure is designed to reduce demand for the Swiss franc, which has traded between 1.08 and 1.09 francs per euro for much of 2016.
Despite SNB interventions to limit the franc's appreciation following Britain's vote to quit the European Union, the highly valued currency remains a headache for Switzerland's export-orientated economy, economists said.
Switzerland unemployment rate Aug SA 3.4% vs 3.3% exp
Swiss jobs data for August 9 Sept
No Change From The SNB On Thursday; EUR/CHF Neutral
We expect the SNB to keep its policy settings unchanged at its September meeting (Thursday) including its policy rate at -0.75%, the target range for the three-month Libor at -1.25/-0.25% and the exemption from negative deposit rates it gives on the majority of domestic banks’ reserves.
Subdued market volatility since Brexit, has implied a c.1.6% CHF REER depreciation, which in addition to a modest improvement in Swiss data, should keep the SNB comfortably on hold, in our view. Reduced pressure for the SNB to act can also be implied by the decline in our estimates of FX intervention since June (Figure 5).
We expect the policy announcement to be neutral for EURCHF.
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