Forex Focus: Strong Swiss Recovery Won't Help The Franc

The Swiss economy may be recovering faster than expected but the Swiss currency won't.

In fact, the Swiss franc is more likely to fall than rise from here.

Despite the strong data, the Swiss economy remains at risk from the steepest recession since the Second World War and the Swiss National Bank isn't about to start hiking rates yet.

If anything, with the franc's trade-weighted index now up at a two-month high, the SNB will be even more vigilant about the currency's strength and more likely to intervene if the euro falls much closer to CHF1.50.

Last week, SNB board member Thomas Jordan repeated the bank's objection to further franc strength as the recent rash of economic data pushed the currency steadily higher.

A strong rebound in the Kof business survey last month was followed by the latest purchasing managers' index, which rose firmly back over the 50 level that denotes economic expansion. Not only did all the subcomponents of the index show a healthy improvement but the index is now at its highest level relative to the euro-zone PMI since the end of 2008.

"This is impressive when you consider that Swiss manufacturers are still grappling with a particularly strong exchange rate," said Eoin O'Callaghan, a euro-zone economist with BNP Paribas in London.

On top of this, second-quarter gross domestic product figures showed that the economy contracted by 0.3% rather than by the full 1.0% that had been forecasted.

This has boosted the view that the Swiss economy may well be facing a V-shaped recovery.

Nevertheless, none of this is enough to bring about a policy change.

A continued rise in Swiss unemployment is likely to ensure that a recovery in domestic consumption remains sluggish.

Also, data later this week may show that deflation remains a problem. With the core rate of Swiss inflation likely to undershoot that of the euro zone, market participants will expect the SNB to reverse policy even more slowly than the European Central Bank.

This likely widening in the Swiss-euro zone yield differential will only encourage a rise in the euro against the franc, while the SNB would be expected to intervene again should the pair make it down as far as 1.5110.

Early Wednesday in Europe, the euro was pushing ahead to CHF1.5176 by 0645 GMT from CHF1.5160 late Tuesday in New York, according to EBS.

Sentiment towards the single currency and other high yielders had improved a little after Chinese stocks staged a rebound. The Shanghai Composite Index was up 1.1% despite earlier equity market losses that dragged the Dow Jones Industrial Average down 2% and the Nikkei 2.4%.

The euro was up at $1.4238 from $1.4217, while the dollar rose to Y93.08 from Y92.93. The euro was also up at Y132.41 from Y132.12.

Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 15 years. Apart from his written commentary and analysis, he also appears on CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)