While vapid liquidity and volatility ruled the broader currency market last week, the Swiss franc was still on the move with a respectable economic calendar culminating in a near record pace in business activity. While this indicator in itself may be hard to follow up, three major releases for the days ahead will offer the kindling European and US traders -fresh from vacation - need to put the pair back on trend.
Scheduled for release for the week are August unemployment and CPI, as well as second quarter GDP. These reports are not only the foremost barometers of inflation and economic expansion, but they also hold the privilege of being the last three releases economists, traders and monetary policy makers will be able to interpret before the Swiss National Bank policy group deliberates at its September 14th rate meeting. First up, the governmental inflation report for August is expected to bounce back from its biggest contraction in two years reported just the month before. The July 0.7 percent decline was unusual as gas prices rose, demand from abroad subsisted and most indicators until that point were suggesting a liberal Swiss consumers base. However, this was not the case argued by UBSs Consumption Indicator for the same month, which fell from 2.121 to 1.881. While foreign demand seemed to have held up in August, allowing some pass through in higher costs at the factory level, energy prices saw significant declines from record highs. This leaves the ball in the consumers hands, but no official indicator has yet to reflect their recent spending habits. Moving on, should inflation be able to at least hang on to its annual 1.4 percent pace, then the weight could fall to the performance of the economy to determine how aggressive the SNB will need to be in their policy. Gross domestic product, the preferred measure of economic growth, accelerated to a five-and-a-half-year record pace in the first three months of the year on solid demand from across the boarder. Over the following three months exports remained a generous contributor to expansion, but the development of the domestic consumer base on strong employment and wage growth is likely to be the periods primary driver. A consensus of 3.3 percent growth suggests the consumer was not the engine exports were, but the potential for another figure like the first quarter is definitely within the realm of possibility. Finally, round out the week Friday, will be joblessness for August. Already at a three year low, the unemployment rate is becoming hard pressed to sustain such a low percentage of its population. The KOF leading indicator for the same month may be a reliable sign that the economy is topping, but the SVME PMI is at the same time equally convincing of strong labor demand. However, even if the jobless rate drops again, it will be exponentially more difficult to repeat such a move in the months ahead.
Last week, the fundamental action didnt start with the indicators on deck, but rather with comments from SNB President Jean-Pierre Roth. In the prepared speech, Roth suggested strong growth could be the impetus for further rate hikes through the year. He also brought a previously mentioned issue of the depreciating franc against the euro. While some market participants jumped on this as meaning bank intervention could be in store, cooler heads saw this as just another reason behind a rate hike as loosening monetary conditions have been the unwanted side-effect. Though the comments were well received, the Swiss unit was already firming against the US dollar, bringing the spot rate to 1.2320. When the first official indicator hit the newswires, it was greeted with a disappointed crowd. The UBS Consumption Indictor for July was expected to best the previous months five-year record pace to keep the fire under consumer spending. Instead the contraction to 1.881, was the product of a large cut back in car and retail purchases. The effect of the indicator hung in the air until London and US liquidity merged to take the USDCHF 85 points higher to 1.2880. Following up the day after, the KOF leading indicator index for August reported its first drop in a year. Used to forecast economic growth for the coming six months, KOF officials said the end to the industrial sectors extraordinary growth pace was responsible for the dip. After the weakness seen in the previous days consumption indicator, the confirmation that the economy could be turning from an overall growth read made more than a few traders worry about their Swiss longs. To fill in, over the time spanning this release and Fridays SVME, the USDCHF was able to push all the way down to 1.1225 before bounding 115 points in preparation for the last release of the week. With the bears fully ready for a third indicator supporting a dumping of francs, the market was shocked to receive the strongest pace of manufacturing growth in recent history. Predicted to fall slightly to 64.5, the SVME purchasing managers index actually rose to 68.2 for the month of August. Components of order backlogs, purchases, prices and employment all grew; suggesting the SNB was offered everything it needed to lift rates in a single indicator. Despite the indicators significance, the USDCHF ended near a new support level around 1.2300, well between the major support and resistance levels seen at 1.2400 and 1.2200 respectively.
