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CHF strength cushioned by fundamental support: The recycling of persistent Swiss current account surpluses overseas grew erratic after 2008, and the Swiss financial ex-reserves account has tended to be in surplus since, which has propelled a huge rise in the SNB’s reserve holdings. The foreign currency inflow through the current account is basically coinciding with net inflows through the financial account. These twin surpluses are providing fundamental support to the franc.
Little impact from franc overvaluation: Swiss growth has recovered this year, with the manufacturing PMI recently rising well above 55. The unemployment rate has held steady at 3.3% all this year. The Swiss current account balance remains in rude health and has not tracked under 8% of GDP since 2012. Despite general agreement that the Swiss franc is overvalued, there are few economic symptoms of said overvaluation.
Firm SNB policy ahead: Headline inflation has been climbing but remains negative year-on-year. It does appear that the worst of the deflationary shock has passed, but inflation will stay sluggish. We do not expect further SNB easing measures this year, but the central bank will be alert to any sharp moves in EURCHF under 1.07.
Gradual euro strength should nudge EURCHF higher. The litany of European political risks next year, coupled with the potential for global market volatility from rising US dollar and US yields, suggests that CHF should stay supported in H1’17, but gradual euro strength in the latter half of the year should help drive EURCHF back towards the recent 1.12 high.
