Mitigating risk aversion reassures the SNB

De-escalation of tensions in Iran following the relieving speech made by US President Donald Trump confirming that no military actions should be undertaken in Iran following missile strikes gives safe-haven Swissie some breathe. Furthermore, positive headlines related to the US – China interim trade deal, expected to be signed by both sides on 15 January, should maintain the Swiss franc untouched, albeit talks on the second phase stay far from obvious. For now, EUR/CHF trades at end-April 2017 range, slightly above psychological support of 1.08 while USD/CHF trades largely below par since end-November 2019, above the 0.97 range. In this context, the SNB is likely to observe FX movements more carefully, as downside pressures on both pairs of an additional percentage point should force the SNB to resume with market interventions more vigorously to reduce risks on its exporting industry.

Indeed, even if consumer inflation seems stabilizing, with the core gauge maintained at 0.40% (prior: 0.40%), while the soft indicator KOF shows recovery, mixed signals remain on the manufacturing front. Although the broad-based manufacturing PMI pointed at 50.2 (prior: 48.8) in December 2019, back in modest expansion territory for the first time in nine month amid weaker demand from main trading partner Germany along with political disruptions, the Raiffeisen SME PMI indicator pulls in the opposite direction. Marking at 47.1 (prior: 50.3) in the same period, all subcomponents of the Raiffeisen PMI are in contraction territory for the first time since inception of the metric while both employment and production remain major laggards along with backlogs. In this backdrop, it appears that a deterioration in the competitiveness of the CHF is likely to maintain the range of 1.50% to 2% of the SNB's GDP growth target in question.

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