The Week Ahead (July 1-5), Switzerland – Getting Franc
Despite over a decade of economic stimulus by Switzerland’s central bank, the nation’s rate of inflation remains slow, its manufacturing sector lingers in contraction, and its currency is still highly valued.
At its latest meeting in mid-June, the Swiss National Bank (SNB) elected to maintain its expansionary monetary policy, with an ongoing aim of stabilizing prices and supporting economic activity.
The SNB said its negative interest rate policy (NIRP), and its willingness to intervene in the foreign exchange market, “remain essential in order to keep the attractiveness of Swiss franc investments low,” and ease pressure on the currency.
When U.S.-China trade frictions flared in May, the Swiss franc and the Japanese yen – both typical safe-haven currencies – had both appreciated.
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In fact, the Swiss franc had risen roughly 5.0% against the U.S. dollar since late April, before pulling back somewhat despite heightened downside risks, including geopolitical tensions between the U.S. and Iran, ongoing global trade frictions, an unresolved path towards Brexit and European auto sector woes.
The pair was last bid at around CHF 0.9781, according to the IBKR Trader Workstation.
Meanwhile, the yield on 10-year Swiss Confederation bonds was bid Tuesday at roughly –0.565%, around 46.5 basis points lower than in December.
Thomas Jordan, chair of the SNB governing board, said at the central bank’s June meeting that the global decline in long-term interest rates reflects the heightened risks.
Indeed, the yields on 10-year Japanese government bonds, as well as German, French, Dutch and Swedish notes, were trading Tuesday at around -0.161%, -0.333%, -0.010% and -0.015%, respectively.
Jordan also said that the “situation on the foreign exchange market is still fragile” and in light of the high valuation of the franc, the central bank’s “willingness to intervene remains necessary, as does the negative interest rate.”
At that time, the central bank also introduced the SNB policy rate, which currently corresponds to its -0.75% interest on sight deposits held by banks. The change effectively replaces its previous target range for three-month LIBOR, given the UK’s Financial Conduct Authority will only be maintaining that benchmark through the end of 2021.
A History of Low Rates and Rising Debt
The SNB has implemented NIRP for more than four years, with the lower bound on its target range for three-month LIBOR at 0.00% since at least the end of December 2008 in the wake of the housing market crash and credit crunch.
While the central bank has been keeping a watchful eye on exchange rates, its NIRP – intended in large part to mitigate “an inappropriate tightening of monetary conditions” following the removal of its exchange rate floor in January 2015 – has also spurred the country’s debt levels to massive heights.
According to the Bank for International Settlements (BIS), as a percentage of gross domestic product (GDP), Switzerland’s non-financial corporate debt has ballooned to more than 118% as of December 2018 from 90% ten years prior.
The BIS places the country’s corporate debt at a total of around US$828bn at the end of December 2018 compared to about US$500bn at the end of 2008.
Against this backdrop, the nation’s retail sales have resided in negative growth territory on a year-over-year basis since November 2018, its rate of inflation remains slow, and its manufacturing sector has lingered in contraction since April 2019.
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Economic Calendar
Investors will receive updates on these figures in the week ahead, which should provide additional insights into how Switzerland’s economic growth has been faring considering the escalating downside risks to the global economy.
Monday, July 1
- Retail Sales (May)
Tuesday, July 2
- SVME Manufacturing PMI (June)
The Swiss Manufacturing Purchasing Managers’ Index (PMI), produced by Credit Suisse and procure.ch, rose just slightly in May to 48.6 from nearly a four-year low of 48.5 in the prior month. However, activity is firmly fixed in contraction territory, amid continued deterioration in business inflows and production.
Thursday, July 4
- Consumer Price Index (June)
The Swiss CPI rose 0.3% in May from the previous month to 102.7, according to the Federal Statistical Office (FSO). The FSO attributed the incline to an uptick in fuel prices, as well as international package holidays. In contrast, prices for hotel accommodation and books decreased.
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Earlier in June, the SNB raised its conditional inflation expectations for the coming quarters compared to its outlook in March, mainly on the back of higher prices of imported goods.
For 2019 it stands at 0.6%, up from 0.3% last quarter, while for 2020, the SNB anticipates an inflation rate of 0.7%, compared to 0.6% in the previous quarter. However, the outlook for 2021 is 1.1%, 0.1 of a percentage point lower than the prior quarter.
The SNB’s inflation expectations assume its policy rate will remain at –0.75% over the entire time horizon.
Taking Risk
In the meantime, some Swiss company stocks have been benefiting by the stimulus the SNB has been providing.
The iShares MSCI Switzerland ETF (NYSEARCA: EWL), for example, which includes among its top holdings Nestle (OTCMKTS: NSRGY), Novartis and Roche Holding (OTCMKTS: RHHBY), has increased by more than 23% from its most recent 52-week low set on December 24, 2018.
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Meanwhile, other global central banks, which have also maintained ultra-low interest-rate, ZIRP or NIRP at least since December 2008, including the European Central Bank (ECB), the Bank of Japan, Sweden’s Riksbank and the U.S. Federal Reserve, have seen a spike in debt levels.
As of December 2018, the BIS has recorded the amount of non-financial corporate debt as a percentage of GDP in the Euro Area, Japan, Sweden, and the U.S. as 105%, 102.6%, 155.5%, and 74.4%, respectively.
Investors watching developments unfold that may directly or indirectly affect Switzerland’s economic health and financial well-being may find further direction following the updates in the week ahead on its retail trade, manufacturing, and consumer prices.
For more insights, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this ...
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