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FUNDAMENTAL ANALYSIS

GBP/CHF: Summer Solstice

GBP, CHF, Swiss Franc, Summer Solstice, Fundamnetal Analysis, fx trader, forex

27 Apr 2016

The Swiss Franc has always been a source of safety for investors around the world and much to the pride of Switzerland and to the annoyance of the Swiss National Bank. Switzerland’s economy is dependent on exports and a strong Franc negatively impacts its economy. Further, many of Switzerland’s famous discretionary accessory exports, watches for instance, have been affected by the slowdown in the Asia-Pacific economic region1. “...The Swiss watch sector's exports in March alone fell nearly 17 percent in real terms, when adjusted for working days, to 1.5 billion Swiss francs, data showed on Thursday, the lowest level for that month in five years. It was the fourth consecutive quarterly fall and the biggest since the global financial crisis...”

However, the Swiss export market goes well beyond high-end accessories. Recent data indicated a decline in Switzerland’s trade surplus. The trade dynamic of having a too strong currency usually results in an increase in imports and a decline in exports and this is precisely the situation here2. Still, it’s a bit unclear for the stronger Swiss economic sectors, for instance, pharmaceuticals. Novartis (NYSE: NVS) reported disappointing earnings but attributed the decline in revenue to patent expirations and slow acceptance of a newly marketed heart medication3. On the other hand, it was made clear by consumer staple manufacturer Nestlé S.A.(VTX: NESN), last February that the lowest reported quarterly sales figures in years were attributed, in part, to a strong Swiss Franc4.  

The point of the matter is that there’s no sidestepping the issue: a too strong domestic currency impacts exports, especially when most other currencies are being weakened by central bank easing. The SNB is well aware of the situation, but the matter is further complicated by excessive capital inflows.

The SNB has been determined in its efforts to stave off the tide of inflows by conventional as well as non-conventional policy measures. The SNB began to ratchet down interest rates in December of 2014, to -0.25%, but it soon proved insufficient. The SNB took further steps in January 2015, unpegging the Franc from the Euro had decreasing the key rates further; the benchmark rate was set at -0.75%. In April of 2015, the SNB decreased the number of exemptions for the negative overnight rate5. Also, the SNB took the extreme measure of announcing its willingness to intervene in foreign exchange markets, reiterated in each statement following the January 2015 policy action. According to analyst surveyed by Bloomberg6, the threshold for further rate suppression is at CHF 1.03 per Euro. It should be noted that the Euro still carries a 35 basis point advantage over the Franc; i.e., the Euro has a ‘less negative’ carry.

GBP, CHF, Swiss Franc, Summer Solstice, Fundamnetal Analysis, fx trader, forex, Price Event ChartPrice Event Chart

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