It has not been a good batch of data from the Swiss economy last week and to start this week. As a result the Swiss Franc should be pressured from a fundamental standpoint, especially against other safe havens like the USD and JPY.

Let's review the 4 crummy reports we gotten from Switzerland, showing a slowing economy.

1. UBS Consumption Indicator Plunges - Last week we saw the UBS consumption indicator fall to 0.79 in August, from 1.29 in July. It was the biggest monthly drop in the past nine years and the concern came rom weaker retail sales.

2. KOF Leading Index Slides Sharply -Also last week the KOF leading index fell to 1.21 in September, from 1.61 in August. it was a sharp decline and was much lower than the 1.46 expected by economists. Rose to week readings put pressure on the Swiss franc is implied that the economy was weakening and that the S&P would have to keep accommodative policy for longer.

Therefore this Swiss franc was already on the back foot heading into this week's trading based on its fundamentals, and what we have seen to begin the weaker only furthers that theme.

3. Retail Sales Undershoot Forecasts of a Gain, Fall Instead - Overnight we saw retail sales falling 1.9% on the year for the month of August, a big disappointment compared to the forecast of 4.5% increase. The drop in August wipes of a very gains seen in July. This means that's consumers are retrenching amid concerns of a possible zero gross or recession scenario in the euro zone, as well as the prospect of a weaker Swiss economy on the back of the strength of the Swiss franc, which undercuts exports as well as the tourism industry.

4. Manufacturing PMI Shows Contraction in Activity - To drive home the point of weaker manufacturing overnight we also saw the SVM E PMI fall below the 50 level separating expansion from contraction, with the PMI falling to 48.2 in September from 51.7 August the forecast had been for of 50.3 reading. Again this shows the pressure that's Swiss manufacturing is coming under as a result oh strong Swiss franc.

Weaker Economy Means SNB Will Keep Loose Policy Longer, May Want to Raise Ceiling in EUR/CHF

These data reports will give more ammunition to those on the Swiss National Bank that would like to see the floor in the euro Swiss set even higher than 1.20. However intervention in the markets is quite expensive for the Swiss National Bank and therefore while lowering the Swiss franc is an admirable goal, it could put strain on the SNB's balance sheet.


From ZeroHedge: As a result, as the chart below shows, the latest central bank balance sheet to be completely devastated as a result of currency wars is that of Switzerland, where both Foreign Currency Investments and the total balance sheet increased by just under 50%, the biggest such monthly increase.

In fact, in September, aggregate short and long positions in forwards and futures in foreign currencies vis-a?-vis the domestic currency (including the forward leg of currency swaps) increased by $92 billion CHF or just about $100 billion - a whopping 20% of Swiss GDP! And this is the capital at risk for Switzerland to avoid having its currency trading a parity with the euro since the bulk of this increase is due almost certainly purely to EUR purchases.

And with the SNB's total balance sheet at a record CHF 365 billion, something tells us that the days of this latest attempt at repegging the Swiss Franc to some arbitrary number are coming to an end.

The SNB ceiling was also the right level according to Swiss Finance Minister Eveline Widmer-Schlumpf, so a move to raise the ceiling may not be in the cards soon. Widmer-Schlumpf also mentioned that capital controls and negative interest rates are being examined. This is in preparation for the worst case scenario in which a Greek default causes a puncture of the 1.20 floor in the EUR/CHF.

Still, while the cost of intervention is high, overall the data points to a weaker economy and therefore further loose and accommodative monetary policy, which means that the Swiss franc is likely to weaken against its safe haven rival US dollar.


We have seen the USD/CHF pair rallying following that intervention by the SNB, and may extend this rally on the back of these 4 crummy fundamental reports. In this hourly chart, we are looking to see if the USD/CHF can breach the 0.9180 area, our highs from September 21st, while in the daily chart, we look towards a pivot at 0.9310 as further upwards target

For a further technical look at the USD/CHF, see the technical update: USD/CHF Forecast: Bullish Continuation Opens Scope for 0.9180 and 0.93

Nick Nasad
Chief Market Analyst