The improvement in the European debt crisis was also felt in the Swiss franc – EUR/CHF moved to a safer distance from the 1.20 peg. So, also USD/CHF began trading somewhat independently of EUR/USD.
While this renewed life is nice for traders, it isn’t nice for the franc, which lost ground. With fresh worries from Europe, the franc could return to trade in tandem with the euro. Swiss fundamentals support a continued peg.
- Recession coming: The Swiss economy didn’t contract since mid-2009. This changed with the report for Q2 2012 that showed contraction of 0.1%. One more quarter, and Switzerland is in recession.
- Prices are not rising: The last time that Switzerland saw price rises was back in April. One of the SNB’s goals was to fight deflation. There is still a long way to achieve that.
- Retail sales slow: the result of falling prices is less consumption, with the annual level of falling to 3.2%.
In September’s quarterly rate decision, the SNB did not alter its policy. Some had speculated that the SNB would raise the peg. Raising the peg is quite hard with an uncertain environment in all the countries that surround Switzerland.
In October, EUR/CHF could settle back closer to the 1.20 line, depending on the European debt crisis. Only a very big event such as an immediate Greek exit or something sudden regarding Spain could challenge the SNB’s peg, that worked very well so far.
However, it is important to note that nothing lasts forever and that the levee could break. The SNB was lonely on the big for many months.
This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.
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