CHF: Twin surpluses supporting franc - SocGen

Alvin T. Tan, Research Analyst at Societe Generale, suggests that despite general agreement that the Swiss franc is overvalued, there are few economic symptoms of said overvaluation.

Key Quotes

“Swiss growth has recovered this year, with the manufacturing PMI recently rising well above 55. The unemployment rate has held steady at 3.3% all this year. The Swiss current account balance remains in rude health and has not tracked under 8% of GDP since 2012.” 

“Fundamental support for CHF strength. The recycling of persistent Swiss current account surpluses overseas grew erratic after 2008, and the Swiss financial ex-reserves account has tended to be in surplus since, which has propelled a huge rise in the SNB’s reserve holdings. The foreign currency inflow through the current account is basically coinciding with net inflows through the financial account. These twin surpluses are providing fundamental support to the franc.”

“Steady SNB policy ahead. Headline inflation has been climbing but remains negative year-on-year. It does appear that the worst of the deflationary shock has passed, but inflation will stay sluggish. We do not expect further SNB easing measures this year, but the central bank will be alert to any sharp moves in EUR/CHF under 1.07.”

“Gradual euro strength should nudge EUR/CHF higher. The litany of European political risks next year, coupled with the potential for global market volatility from rising US dollar and US yields, suggests that CHF should stay supported in 1H17, but gradual euro strength in the latter half of the year should help drive EUR/CHF back towards the recent 1.12 high.”