Swiss economy grew better than expected in Q2

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However, exports growth slowed to 1.7 percent from 3.7 percent.

“Switzerland’s economy is in good shape,” said Alexander Koch, an economist at Unicredit Group in Munich. “Still, a faltering global economy will show an impact on exports.”

In fact, the President of Switzerland's central bank, Philipp Hildebrand, recently warned that he expects a “weaker” economic momentum in the second half of 2010 as a global slowdown and a stronger Swiss franc will likely hurt Swiss exports.

As such, the central bank, the Swiss National Bank (SNB) has indicated it is in no hurry to hike interest rates from their 0.25 percent level.

Loynes also cautions that the country's exports prospects will likely turn sour.

“Switzerland sends around half of its exports to the euro-zone and will suffer from fiscal tightening there,” he said.

“What’s more, sound economic performance, rising risk aversion and the end of SNB intervention have prompted the franc to appreciate sharply lately. We see a further appreciation adding to downward pressure on exports in the coming months.”

Indeed, of great concern in the Swiss franc which has climbed 14 percent against the euro this year and risen 2.4 percent against the U.S dollar.
The SNB was recently forced to add billions of euros onto its balance sheet to try to weaken the franc – given that exports represent more than half of the Swiss GDP.

In fact, the SNB lost more than 14 billion Swiss francs (or $13.3 billion) on foreign-currency holdings in the first half after the plummeting euro hurt the value of the bank’s reserves.

“The Swiss franc is a 'safe-haven' currency belonging to a stable country with positive growth expectations,” said Douglas C. Borthwick, managing director at Faros Trading in Stamford, Conn.

“It strengthens in times of global uncertainty, and acts as a proxy for gold in terms of being a vehicle for wealth preservation.”

Borthwick added that in recent months the SNB has shown that intervention has been a painful exercise given the losses they made through intervention.

“The SNB is now much less interested in weakening the Swiss franc, and more interested in smoothing its strength so that exporters have ample opportunity to hedge,” he noted.

“All of these contributing factors make the franc appealing to investors.”

Mansoor Mohi-Uddin, global head of currency strategy of UBS AG in Singapore was quoted as saying that today’s Swiss second-quarter GDP data “confirms how closely Switzerland is matching Germany’s economic performance. We expect the franc to remain strong throughout the decade.”