Fundamental Analysis – Explaining the Swiss Economic Data

If there’s one country in the world that represents neutrality, Switzerland is it. This tiny country at the heart of Europe represents a safe haven for the world. People from around the world send their savings or extra money into Swiss deposits, for whatever the reason. The country has not been involved in any major conflicts and, to this day, it is not part of the European Union or the Eurozone, despite being surrounded by European Union members and Eurozone countries. Because of that, it wasn’t possible for it to completely isolate itself from the rest of the world from a trade point of view, and there is a special treaty that allows Switzerland access to the single market. There are advantages and disadvantages to having a status like the Swiss economy has.

Firstly, the fact that it still has its own currency is an advantage, as monetary policies can be pursued to influence its value. These don’t have a happy ending all the time, though! The moment is now famous when the Swiss National Bank (SNB) dropped the peg on the EUR/CHF pair. For those of you who are not familiar with it, for years the SNB kept the EUR/CHF pair above the 1.20 level in an artificial manner. This is not difficult to do if one considers that the Bank of International Settlements (BIS) acts as the arbitrage party in the whole story. However, when the European Central Bank (ECB) decided to cut the interest rates (the rate corridor) in the negative territory, it was too much for the SNB. In fact, the bank was forced to drop the peg because its profitability was in danger. The whole process was expensive for the Swiss central bank, as it resulted in a multi-billion loss of Swiss francs, and, even more importantly, its reputation was damaged. As with anything in this world, time solves all these problems, and these days few people remember the chaos that followed the dropping of the EUR/CHF.

Secondly, a disadvantage would be that worldwide flows are pouring into its currency, and this makes for unusual circumstances that the central bank must constantly face. All in all, then, it is not clear whether this status is a blessing or a curse.

What Data Matters for the Swiss Economy?

Switzerland’s currency is the Swiss franc (CHF). It is one of the strongest currencies in the world, and trading it is subject to a lot of pain. This comes with side effects both for the Swiss population and for its economy. Strong currencies are difficult to deal with, as exports become less and less competitive. Because we live in a globalised economy, exporting more than importing would result in a trade surplus, which is easier to handle than a deficit. Below are some of the things to consider when trading the Swiss Franc.

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The Libor Rate

The Swiss National Bank (SNB) meets quarterly to assess the state of the economy, and the event is not well publicised. This central bank is not so popular as the ECB, the BOJ or the Fed, and this is related to the fact that the meetings are not held so often. However, when the SNB has something to say, everyone listens. The current SNB president, Mr Jordan, is an active member of the Bank for International Settlements (BIS) and his opinion is highly valued worldwide. The interest rate decision is called the Libor rate, and represents the London interest rate for 3-month Swiss franc deposits. As can be seen on the image below, this is negative, currently at -0.75%. History tells us that this level is more than 6 month sold. So why is the SNB pursuing a negative interest rate on 3-month Swiss franc deposits? The answer is because it is trying to curb the flows into the Swiss currency. The CHF is bought when market participants or other people all over the world are looking for safety for their funds. A negative interest rate for CHF deposits implies that people are paying money to the banks for the privilege of depositing money with them. This is an absurd concept in most of the world, but these days it is a common practice in many central banks’ jurisdictions.
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The SNB Monetary Policy Assessment

This is the primary tool used to communicate the monetary policy, and it is a press conference. Like the Libor decision, it is scheduled quarterly, and contains decisions on interest rates as well as commentary about the economic conditions that influence the SNB optic.
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CPI – Inflation

Inflation plays its role in the SNB’s decision-making process. Higher inflation is treated with higher rates, and lower inflation with lower rates. In Switzerland, though, the SNB is more flexible with inflation. The rise or fall of inflation is not watched as closely as it is in the other parts of the world. The SNB can let the inflation overshoot a bit over 2% if this will curb the flows in the CHF. Moreover, the SNB constantly intervenes in the Forex market to control the value of the CHF. The last few years saw many events that were considered a risk becoming reality. To give you just two examples from 2016, the Brexit vote and the US presidential election both resulted in outcomes that were considered risky. This means that the SNB had to intervene, because in these situations traders and investors buy the CHF against everything to protect their investments in the face of the unknown. In actual fact, the SNB is one of the most active central banks on the currency market, if not the most active. Because of its strong currency, and with limited resources to change that, the Swiss economy is in an almost deflationary state. Lower oil prices have made things even worse, and this is something the central bank is still fighting. Any other economic data, while important for the economy, is not considered important for Forex traders, and is therefore discounted. If you trade the CHF, keep an eye on the SNB and you’ll be on the safe side of the market.

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