As expected, a “no” vote from the Italian constitutional referendum has squeezed investors out of European assets as risk-off sentiment takes over. As usual, the Swiss franc was one of the first to rise against the single currency on spillover from heightened tensions in the eurozone. The recent appreciation of the Swiss franc suggests that market participants are almost immune to economic developments in Switzerland and focussed exclusively on the safe-haven status of the currency.
Last week, the Q3 GDP report released by the State Secretariat for Economic Affairs showed that economic growth was lifeless in Switzerland as exports contracted (goods exports -0.2%q/q and services exports -0.8%q/q) and household consumption increased marginally (+0.1%q/q). On a year-over-year basis, the Swiss economy expanded 1.3% in real terms, compared to 2% in the second quarter and 1.1% in the first. Moving forward, we expect the Swiss economy to remain under significant pressure as the eurozone, its main economic partner, faces a significant year ahead, one full of political uncertainty. This environment should translate into persistent franc strength which should keep pressure on EUR/CHF and the SNB “on the alert”.
This morning, EUR/CHF opened down 0.80% to 1.0698, completely erasing last week gains. However, the single currency quickly reversed losses and returned to its initial level - at around 1.0790 - as the euro recovered on a broad basis. Indeed, it is tempting to say that the SNB has stepped in once again to protect the Swiss franc but given the broader recovery amongst EUR crosses, we see it as a market correction rather than an SNB intervention. SNB sight deposits were released this morning, showing that the SNB stayed side-lined last week with total sight deposits edging lower to 527.5bn from 527.6bn in the previous week, while domestic deposits fell to 5.4bn from 457.6bn.