The Swissie was presented with only two pieces of economic leverage this past week, but thanks to dollar weakness through the final days, the unit was able to recover most of its early-week losses. Furthermore, two strong fundamental indicators helped weigh in on the growing interest over reserve quality and rate differentials that have developed between the Swiss franc and the US dollar.
A lean but important release slate for next week should shed light on both economic sentiment and inflation. Wednesday holds in store the July SVME Purchasing Managers Index release, expected to contract slightly to 63.7, following Julys 64.0 print. The number has been strong through the first half of 2006, hitting an all-time high in March at 65.2 and only showing mild set-backs in April and May. The index gives further support to the general strength of the Swiss economy. The other set of data for the week, that of June CPI, is slated for a Thursday release. The annualized figure is expected to remain within the SNBs target range with a 1.6% read, but the monthly gauge could throw a wrench in the central banks plans to remain on its quarterly 25 basis point rate path. Month over month inflation is expected to decline -0.5%, after last months unchanged read. Swiss inflation remains tame despite strong wage growth, low unemployment at 3.0%, and a strong economy. The National Bank is still expected to raise rates above the current 1.50% level to combat potential future inflation; though at this slow pace of rate hikes, the bank could stop its rate regime long before it reaches a level comparable to its European neighbors.
Taking precedence in this pair lately, as it has for most other dollar-denominated majors, has been the discussion of interest rate differentials. While the SNB normally meets for policy changes only once every three months, its rates are seen to stretch out for some time as healthy export, and now domestic, growth have underpinned the economy through the year. On the other side of the USDCHF pair conflicting data and commentary out of the Fed puts a question mark on an August rate hike from their end. It was Wednesdays dovish Beige Book release that drove USD/CHF off of the weeks high at 1.2548. In the economic field, this past week saw more evidence of Switzerlands economic strength. On Tuesday, the June UBS Consumption Indicator rose further to 2.111 from a revised 1.872 number in May, which itself was the highest reading since April 2002. This move materialized with household spending finding a boost from high employment and subsequent rising confidence. Friday mornings release of the even more significant KOF Leading Indicator composite index showed similar improvements, as the reading climbed to 2.61 in July against 2.56 expected, and up from 2.50 in June thanks primarily to improving business confidence. Growth throughout various sectors have underpinned the Swiss economic expansion, as acknowledged by the Swiss National Bank via two consecutive quarterly rate hikes in 2006. As noted above, the strong data could provide impetus for further rate hikes from the SNB.
