The latest batch of Swiss data suggests that the situation has in fact remained largely unchanged over the past few months as the country continues to suffer as a direct consequence of its safe-haven status. The consumer price index rose 0.3%m/m in March, matching consensus, up from 0.2% in February. On a year-over-year basis, the gauge contracted 0.9%, also matching the median forecast, down from -0.8% in February. The improvement of the monthly increase coincides with the end of February’s sales in the clothing sector (prices surged 4.8%m/m) and therefore the effect will be limited and short-lived.
Overall, inflationary pressures remain subdued in Switzerland against the backdrop of low commodity prices and a strong Swiss franc. We therefore expect the SNB to revise down its CPI forecast for 2016 (currently at -0.40%y/y at year-end) at its next quarterly meeting on June 16th, as the economy continues to adjust to the strong CHF environment. Jobs data, which came in on Friday painted a mixed picture of the Swiss job market. Even though unemployment decreased to 3.6% in March from 3.7% in February, the seasonally adjusted measure rose to 3.5% from 3.4% in the previous month, suggesting that the underlying trend in unemployment is not about to reverse just yet. In addition, when comparing the developments in the job market between the euro zone and Switzerland, one notices that Swiss unemployment has in fact risen continuously since 2013, while in the euro zone the measure has started to reverse the trend, falling from 12.10% to 10.30%. Overall, economic conditions should continue to deteriorate further in Switzerland as the country continues to adapt to the strong Swiss franc environment. This process is not yet complete.
On Thursday data showed that the SNB’s foreign currency reserves rose 5bn to CHF575.8bn from CHF571.1bn, suggesting that the central bank may have intervened in the foreign exchange market to defend EUR/ CHF. This is confirmed by the steady increase of SNB’s sight deposits since the beginning of year. Even though the increase remains modest, it highlights the fact that there is no respite for the SNB. Indeed, the central bank cannot lower its guard as speculators would take advantage of the situation at the first sign of weakness. The data suggests that the SNB is moderately intervening in the FX market, just to remind traders not to play around with EUR/CHF.