The impregnable Swiss franc

Festering doubts concerning the strength of the recovery in major advanced economies such as the US, Japan and the UK are contributing to further strength in the impregnable Swiss franc. Indeed, the Swiss economy continues to deliver positive surprises, as was reaffirmed yesterday. The latest SVME PMI was much stronger than expected last month at 59.2, up from 58.4 in the previous month. Swiss manufacturers continue to benefit from strong global demand with both orders and employment recording elevated readings. In addition, retail sales jumped by 7.5% in the year ended April, an increase of more than 7% in real terms.

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Given the continued strength of the currency, these figures are truly remarkable. Already this year The Swiss franc has jumped by a further 11% against both the dollar and the Japanese yen. With the economy still in good shape, and the central bank concerned that prolonged low interest rates will artificially boost credit demand, it is looking increasingly likely that the SNB will tighten monetary policy soon, quite possibly within the next few weeks. It will need to consider the ramifications of the tightening of financial conditions which the stronger currency represents before deciding to tighten. That said the economy has shown an extraordinary ability to cope with the strong exchange rate over the past couple of years.

Right now, it is difficult to see why the Swissie will not remain in favour. The economy seems healthy with the strong currency helping to thwart concern about rising inflation. Other major currencies such as the dollar and sterling have been deliberately debased and no longer seem quite as sound in terms of representing stores of value, and the euro is bedevilled by sovereign debt worries. It remains the best of times for the Swiss currency.

Michael Derks, Chief Strategist