One interesting aspect of tonight’s market reaction has been the particularly poor performance of the Swiss franc, as the unit came within 3 points of the 1.6200 level on the EUR/CHF cross. In a classic case of throwing baby out with the bath water, the market has decided to sell all the low yielders and as the currency with second smallest yield in the industrialized world, the Swissie has suffered from its association wit the yen. Yet there are considerable differences between the two economies, not the least of which is the fact that the Swiss consumer is far healthier than his Japanese counterpart. Today’s Swiss Retail Sales printed at 3% versus 1.8% forecast while the ZEW survey of economic expectations improved to -10.8 from -23.7.
The rally in the EURCHF pair has been driven by the disparity in the pace of rate hikes between the SNB and the ECB last year. However, with ECB choosing to hold off on rate hikes until March and with SNB strongly signaling that it will continue the rate normalization process, at the very least the two central banks should match each other as the year progresses. Furthermore, with the Swissie so markedly weaker against the euro, the SNB may be fearful of importing inflation and may opt for a 50bp hike at its next meeting. In either case the Swissie appears to be grossly oversold against the euro and if the Swiss economic data continues to impress such imbalances are not likely to last for long.
