Increase in deflation could grow concerns about CHF strength

Jonathan Webb, Head of FX Strategy at Jefferies Bache, on Swiss Franc

Switzerland do have some concerns regarding its housing market as the mortgage lending has grown at a faster pace than the economy, and between 2008 and 2013 apartment prices increased by a quarter. Do you think that the central bank is paying enough attention to this matter?

I believe the value of property in Switzerland is related to the safe-haven effect from the continuing impact of the financial crisis, Eurozone crisis, and increased tensions in the emerging markets. There have been some measures taken to make the process of buying the property in Switzerland harder but it is hard to see a scenario where the SNB would raise rates at the moment, when they are stuck in the deflation. That makes it very hard for them to seriously change policy to limit house price increases.

What kind of events and decisions could determine Swiss Franc performance?

I think it is important that the SNB focuses on the level of deflation. If we start to see deflation increasing (i.e. prices falling at a faster rate) which is possible given the fact that inflation is dropping in the Eurozone as well, policymakers will become concerned about strength of the Swiss Franc.

The other element is Switzerland’s growth, which has proved to be better than expected. However, if that growth slows, it would also impact the Swiss Franc. Moreover, safe haven flow into Switzerland is obviously a driving factor for the nation’s currency. If the situation in the Eurozone continues to stabilize, then at some point we may see that some of those flows come out from the country, which would consequently weaken the Franc.

What are your forecasts for USD/CHF and EUR/CHF for longer and short term and what kind of trends do you expect to see?

We actually do think that EUR/CHF will go up in the end, thus in the long term we forecast the pair to head towards 1.30. In the meantime though it looks like there is not any immediate impetus for that to happen, hence our short term prediction is 1.23.

On USD/CHF, we suspect that over time it will inch higher as well, as we see that the U.S. Dollar will eventually start to strengthen. However, we do not think it will for some time. Thus, in the longer term, we assume USD/CHF is heading back to 1.00, but our short term forecast stands at 0.90.