Disappointing Swiss GDP results

Analysis and Discussion by Charles Porter:

Two statistics have been released by the Swiss Federal Statistics Office this morning. Meanwhile the Franc weakened. In order to analyse this effect, we consider the Swiss Franc (CHF) against key international currencies and its safe-haven partner, the Japanese Yen.

The Swiss Franc has received heightened attention in recent weeks. Analysts have investigated the Franc as a safe-haven currency of choice amidst a tumultuous global political economy. As attention turns to the US debt limit and stagnant Brexit negotiations, whilst the tension surrounding the Korean Peninsula only thickens, investors have flickered rapidly between risk- neutral, averse and inclined positions. Meanwhile, money’s pursuit of sanctity has therefore lead to a significant and sustained increase in the price of gold over. The traditional safe-haven currencies of the Japanese Yen and the Swiss Franc have not seen such sustained increases but have experienced intraday revaluations derived from the trend.

Intraday revaluations such are these are what we analyse below. The threat posed by North Korea could be thought to inhibit investors’ choices to purchase the Yen, or equities denominated therein, due to Japan’s geographical proximity to the Peninsula. However, the Japanese Yen is still being framed and discussed as a safe-haven currency as the threat remains contained and inconclusive.

Despite the intuition of the Franc and Yen as safe-haven currencies, the domestic economy and its interaction with the global economy is as much, if not more, of a factor in the exchange rate as the independent international context. Therefore, the information provided by the Swiss Federal Statistics Office this morning seems to have generated considerable volatility within the Franc’s currency pairs.

The announcement of weak Gross Domestic Product (GDP) growth, followed by a modest Consumer Price Index (CPI) update, occurred with a concurrent depreciation of the Swiss Franc against major currencies, including the US Dollar, the GB Pound and the Euro. The former two depreciations are included within the graph below, alongside an approximation of the magnitude of each movement.

Weak GDP growth, released at 06:45 BST, stood at 0.3% both quarter on quarter and, damagingly, year on year. In response to the year on year growth result, the Franc fell immediately, but modestly, against major international currencies. However, the depreciation continued throughout the morning, seemingly around 08:15 BST. This time is when Swiss inflation, measured by the CPI, was published. Counter intuitively, the inflation report was promising as the deflationary pressure associated with an excessively strong currency showed no sign of manifestation.

Therefore, it is plausible that the selloff of the Swiss currency may have been caused either by the aggregate effect of the two noteworthy releases or by a risk on evasion of the currency safe-haven as the UK market opened. The relative depreciation of the Swiss Franc against the Japanese Yen suggests a prejudice against the Franc specifically is responsible for the depreciation, not a risk on strategy.