Swiss Franc Not Too Good on Economy Market

The Swiss Franc began the week significantly stronger against major currency counterparts, but a later reversal in the Dow Jones Industrial Average and other major equity indices forced a commensurate pullback in the risk-sensitive currency. Indeed, the tremendous tumbles in global stock markets sent the low-yielding CHF near record-highs against the US dollar and 13-month heights against the euro. Yet the Swissie turned on a dime when a surprise 75 basis point interest rate cut from the US Federal Reserve sent major risky asset classes significantly higher in its wake. Domestic economic developments took a backseat to the happenings in global financial markets, and we saw relatively little reaction to modestly disappointing inflation and retail sales figures.

According to the Swiss Federal Statistical Office, Producer and Import Prices unexpectedly fell through December on falling raw materials costs. Given forecasts of a 0.2 percent monthly gain, the result certainly proved disappointing to those that believe that higher import prices will drive the Swiss National Bank to raise rates through 2008. Yet one month does not make a trend, and markets will clearly wait until the release of later inflation numbers to shift forecasts on domestic yields. A subsequent Adjusted Retail Sales report likewise came below consensus forecasts, however, and consumption growth rates remained relatively low at 2.9 percent on a year-over-year basis. Though traders mostly ignored both retail sales and prices reports, it remains clear that continued disappointments in economic data could sink the recently high-flying European currency.

The coming week will help solidify Swiss interest rate forecasts, as closely followed KOF Leading Indicator and SVME PMI reports will provide a forward-looking peak at the robustness of the domestic economy. Current consensus forecasts show that analysts believe the KOF Leading Indicator will fall to 9-month lows through January hardly a bullish assessment on overall growth prospects. Subsequent SVME-PMI figures are forecast to show a similar deceleration in overall expansion; an in-line result would leave the figure at its lowest levels since September. It will be important to watch developments in both KOF and SVME reports, and any significant disappointments would only further temper bullishness for the domestic currency.

Yet Swissie price action will likewise depend on developments in broader financial markets. Given the low-yielders strongly negative correlation with major risky asset classes, any further Dow Jones Industrials rebound could sink the CHF against higher-yielding counterparts. Of course, the opposite is likewise true; a strongly negative week for the Dow and other stock markets could leave the Franc at significant heights against the euro and other risk-sensitive currencies.