Things seem to converge in favor of the Swiss National Bank when it comes to FX valuation. One might wonder why the safe-haven CHF depreciated in the past few days when demand for JPY only increased due to a broad risk-off sentiment. There is certainly much to consider as the recent releases of poor economic and inflation data combined with little exchange rate intervention should explain part of the decline. The latest quarterly monetary policy meeting of the SNB from 19 September 2019 remained silent, with the SNB’s assessment on the Swiss Franc valuation unchanged from current “highly valued” in contrast to “significantly overvalued” as used to be the case in the first half of 2017, suggesting a rather limited FX intervention despite EUR/CHF trading at July 2017 ranges.
SNB’s total sight deposits have remained quite stable in the past seven weeks while 3Q foreign currency reserves published on 7 October 2019 should confirm a rather limited upward trend in currency interventions. On the opposite, the recent batch of negative headlines, including the KOF economic forecasts for the Swiss economy, PMI, inflation and retail sales are supporting CHF bearish bias. The weakening economic momentum from the Swiss economy pushed the KOF Institute to downgrade its GDP growth forecast for FY 2019 and 2020 to respectively 0.90% (prior: 1.60%) and 1.90% (prior: 2.3%), stating business activity and the international environment as major impediments for the export-reliant economy. Furthermore, the collapse in headline inflation to 0.10% (prior: 0.30%), lowest since December 2016 and stable core inflation given at 0.40% (prior: 0.40%) is not boding well as downward risk on the economy combined with a stronger CHF should not support the gauges. On the same line, sales in the retail sector dropped -1.40% (prior: 1.50%) in August, an 11-month low, while manufacturing PMI declined further in contraction territory, posted at 44.6 (prior: 47.2), a level not seen since July 2009. Although slightly below the 50 mark, the Raiffeisen SME PMI indicator points 49.9 (prior: 49.8) amid improving backlogs, production volumes and inventories. In this backdrop, it appears that the decline in the Swissie stays largely justified, although further volatility induced by negative news on the front of both Brexit and trade should maintain CHF in demand, a scenario that the SNB is probably not in a position to prevent.
EUR/CHF is currently trading at 1.09507, bouncing from 1.08594 (10/10/2019 low) and approaching 1.0970 short-term.
