By FXEmpire.com
Outlook and Recommendation
The EUR/CHF closed the month at 1.2014, holding to a tight range since it violated the SNB 120 floor on April 5th. The pair has been locked in a private battle oblivious to the markets. The EURCHF 1.20 floor remains credible. There has yet to be a turn in deflationary pressures and purchasing power parity suggests that CHF remains 25% overvalued. The commitment by the SNB to the EURCHF floor appears firm; we expect the floor to be raised later this quarter and hold a Q212 target of 1.24.
The Swiss economy continues to face the near-term challenges of financial instability stemming from the euro crisis and persistent upward pressure on the Swiss franc (CHF). The relative stability of the CHF since the start of 2012 – a result of the firm commitment of the Swiss National Bank (SNB) to the minimum exchange rate of 1.20 per euro – has been supportive of economic conditions. Retail sales continue to grow, unemployment remains low and certain survey indicators, such as the KOF Leading Indicator, have recently turned positive. The external sector, however, remains an area of concern. Exports dropped again in March, by 2.5% m/m after rebounding 12.0% in February, while imports showed a reverse trend. Compared to the final three months of 2011, the trade surplus contracted 16% in the first quarter. We expect output growth to average 1/2 % this year and to pick up to around 1 1/2 % in 2013. Deflation has accelerated over the past six months, reaching -1.0% y/y in March (although, on a monthly basis the consumer price index posted its strongest growth in a year, a positive sign for the inflation outlook). If exports do not improve before the June 14th monetary policy meeting, the SNB may consider raising the currency floor. The IMF recently noted that while the direct exposure of Swiss banks to the euro area periphery is modest, in the event of an intensification of tensions in European credit markets, the financial sector could suffer from indirect exposures as well as decreased market liquidity and higher counterparty risk.
Europe is back on global investors’ radar screens: Spain is the focus. Spain’s sovereign credit rating suffered another downgrade action by Standard & Poor’s to “BBB+” in late April. All rating agencies assign a “negative outlook” to Spain at a time when the country’s unemployment rate is approaching 25%. The euro (EUR) is remarkably stable against the USD, yet it shows a divergent trading pattern versus the British pound (GBP) and the Japanese yen (JPY). While EURUSD has been range trading so far this year, the GBP has shown value appreciation versus both the USD and the EUR on the back of asset diversification shifts in favour of non-euro European currencies, its Triple-A rating and improving investor sentiment. Additionally, the GBP received a boost from the Swiss authorities’ firm commitment to fight the appreciation of the Swiss franc (CHF) and defend the EURCHF1.20 ceiling. Portugal and increasingly Spain continue to attract the attention of sovereign debt investors. Credit default swap (CDS) metrics continue to portray a highly distressed valuation in Portugal. This is all happening amidst election uncertainties in France, a critical piece in the European debt puzzle
Central Bank Name: Swiss National Bank
Date of next meeting or last meeting: Jun 14
Current Rate: 0-0.25 % (- 0,50)
Statement highlights of last meeting: The Swiss National Bank (SNB) will continue to enforce the minimum exchange rate of CHF 1.20 per euro with the utmost determination. It is prepared to buy foreign currency in unlimited quantities for this purpose. The target range for the three-month Libor will remain unchanged at 0.00-0.25%. The SNB will continue to maintain liquidity on the money market at an exceptionally high level. Developments in the global economy are mixed. While growth in the US was surprisingly positive in the fourth quarter, GDP fell in the euro area and Japan. In Switzerland, growth has slowed significantly over the course of the past year. Added value declined in the fourth quarter in industries affected by exchange rate movements. While the high value of the Swiss franc continues to present enormous challenges to the economy, the minimum exchange rate is having an impact. It has reduced exchange rate volatility and given business leaders a better basis for planning. There are growing indications that Switzerland’s economy is stabilizing. For 2012, the SNB is now forecasting moderate growth, at close to 1%.
Economic events for the month of May affecting EUR,CHF, GBP and USD
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Tuesday, May 01 |
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10:00 |
USD |
ISM Manufacturing Index |
54.8 |
53.0 |
53.4 |
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Wednesday, May 02 |
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08:15 |
USD |
ADP Nonfarm Employment Change |
177K |
209K |
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Thursday, May 03 |
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07:45 |
EUR |
Interest Rate Decision |
1.00% |
1.00% |
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08:30 |
EUR |
ECB Press Conference |
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08:30 |
USD |
Initial Jobless Claims |
380K |
388K |
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Friday, May 04 |
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08:30 |
USD |
Unemployment Rate |
8.2% |
8.2% |
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08:30 |
USD |
Nonfarm Payrolls |
170K |
120K |
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Thursday, May 10 |
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07:00 |
GBP |
Interest Rate Decision |
0.50% |
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Wednesday, May 16 |
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04:30 |
GBP |
Claimant Count Change |
3.6K |
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Originally posted here
