© Jonathan Webb
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The Swiss economy has probably performed better than analysts had expected, given the Swiss Franc has stayed so strong. Our view is that at some point of time we will see a weaker Franc, but I think one of the factors, which was a slowdown in the Swiss economy, has not occurred as yet. Hence, that has weakened the story for a weaker Franc in a very short term.
What main risks do you see for the Swiss economy in the foreseeable future?
I believe that being next to the Eurozone is not a very good place to be as the Euro bloc still remains in recession, while the Swiss Franc is at extraordinary high level. Therefore, we do feel that the Swiss economy is still quite vulnerable. Especially, it is going to be very hard to get inflation back into the system, even though the SNB forecasts are looking for a return to positive inflation. We see the risks for the Swiss economy to stay in the deflationary environment.
Recently Switzerland has signed a free trade agreement with China, while the Eurozone's economy, the country's biggest trading partner, continues to struggle. How do you see this trading relationship with China to develop in the future? Do you see China to become top destination for Swiss export goods?
No, I do not think that it is likely. In fact, they have signed this agreement at time, when the Chinese economy is slowing down, while the large import of investment goods is slowing quite sharply as well. I suspect that Switzerland will not get too much benefit from that agreement, compared to the demand from the Eurozone.
Recently the SNB President has reiterated that the central bank has no intention to introduce any changes to the Franc's ceiling. How long do you think the central bank will keep the currency peg?
In my view, the central bankers will keep it as long as necessary, since they have a very firm commitment to the 1.20 level. In our opinion, there are very large holdings of Swiss Franc as it is still considered as safe haven, but over time, typically when the world's economy recovers, the Swiss currency will be less attractive. Eventually, EUR/CHF will move away from the band. However, I do not see any prospect of them removing the 1.20 floor.
What is your short and long term forecast for USD/CHF and what will be the main drivers for this currency pair?
We are constructive on the U.S. Dollar, particularly, we see that tapering of QE in the U.S., which we expect to start in September, is a Dollar-positive event. Clearly, the U.S. economy is recovering and there is no need to use non-conventional stimulus measures anymore. We see that the greenback will benefit from that. In our view, the Swiss Franc is vulnerable in an environment where the global economy is recovering. Taking all that into account, we forecast that the USD/CHF currency pair is most likely to go up, and we expect to see it trading above the parity by the end of the year or at the beginning of the next year.