Maybe go back to that reference in the communiqué issued at the end of monetary policy last June 17 to the fact that the risks of deflation are gone thanks to the improved economic situation the Central Bank of Switzerland would not do it more. This, in fact, it was rightly interpreted by investors as a sign that the Swiss monetary authorities would no longer intervene to slow the appreciation of the Swiss Franc against the Euro. And the result was that the exchange rate of EUR / CHF has strengthened its downward trend, going to record over the last few sessions under his own record low 1.30, thanks to the fall in equity markets has encouraged the movement of fly to safety by investors. The appreciation of the Swiss Franc against the Euro on the day of the last meeting of the SNB is more than 5% while in 2010 the gain of the Swiss franc is over 12%.
The situation for the SNB to this point is very delicate: on the one hand, in the Swiss Central Bank has to deal with the sharp increase in foreign reserves in its budget surplus. These, in fact, increased from 2009 to the end of CHF94.680bn CHF226.657 the end of June and up more than 81% of the assets of the Bank. This is exposing the heavy losses to capital: the SNB has CHF14bn the estimated losses on exchange rates in H1'10.
Across the dangers of deflation seems to be all but disappeared, whereas inflation has fallen for three consecutive months and over the same period last year, the increase was a modest 0.4%. In this sense, an important event is the publication of inflation data Friday, September 3rd of August. Consensus expectations are unchanged for a given on a monthly basis with the change over the same period last year stable at 0.4%. Will be evaluated, however, especially the trend of core inflation, which in July had fallen to 0.1% y / y and could see a further decline in August.
The core price inflation may require additional action by the SNB expansive they seem, however, difficult to implement rates almost to 0 and foreign exchange interventions difficult to implement unless you want to further expand the share of foreign currency in the budget of the SNB (at that point would the entire budget in Euro). The Swiss central bank could then find a dead end with a few strings to its bow.
In this scenario only a strong recovery in equity markets, which would reduce the movement of flight to safety, signs of a slowdown in the Swiss economy, which would make investments in Switzerland unattractive, or a sharp rise in inflation globally, which push up the rates at the international level by strengthening other currencies, seem to be able to reverse in a supported the trend of strengthening of Franco. All of these scenarios, however, currently appear to be unlikely, particularly with regard to economic growth in Switzerland. The data on GDP for the second quarter to be published Thursday, September 2, in fact, should show an increase of 0.8% q / q and 2.6% y / y, noting that the Swiss economy as a major recipient of international economic recovery. Moreover, the main leading indicators of the Swiss economy (KOF index, the PMI manufacturing index on consumption prepared by UBS) continue to indicate a continuation of economic growth over the next few months.
The upward pressure on France seems thus to be intended to continue in the short term or at least until the SNB will not take a new position on exchange rate policies. The next event is the Central Bank on 16 September, but it is possible that, if France continues to strengthen with such speed, the SNB will take place at a future day.
After the recent increases in the Swiss Franc is much overvalued compared to the PPP calculated by the OECD: +57% vs. +64% against the U.S. Dollar and the Euro. This could have negative effects on economic growth in Switzerland, increasing the deflationary pressures, although for now it remains sustained. However, a slowdown of the Swiss economy from the coming months is a clear possibility.
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