Swiss inflation was unchanged in April against March. According to Swiss Statistics, on a year basis, the CPI fell by 0.6%. Major reasons were the falling energy prices, reflected in -2.2% YoY in transportation and -0.6% in the category “housing and housing energy”, while rents edged down by -0.3% on the year (read about legal restrictions for rent hikes).
The inflation difference between the Euro area and Switzerland in the terms of the European inflation measure HICP, has reached a new low. Due to the sharply appreciating franc the difference was near 4% in early 2012. The gap has shrunk now to 1.6% and is back at levels of autumn 2010 when the EUR/CHF was trading around 1.32. At that time Swiss inflation was about 0.3% and European one around 1.9%. (read more on self-fulfilling prophecies for FX rates).
Given that in April 2012 oil prices were high and fell until July 2012, the energy effect should wash out in the yearly figures from now. This means that Swiss inflation could go up from -0.6% to 0% until July.
Will the Swiss franc become a risk-on currency?
While ECB presidents Draghi talks about negative rates, the Swiss have a problem with their real estate boom. For us reason enough to believe that the SNB could hike rates earlier than the ECB if the current risk-on environment continues.
Still, the rate hike depends on a recovery of the global economy and may take 3 to 5 years. Thanks to the high immigration into Switzerland, profits of Swiss multinationals in emerging markets and an SNB interest hike, the Swiss franc could become a risk-on currency that shows similar movements to the Swedish and Norwegian Krones. Even at that moment the Swiss economy will show many safe-haven characteristics, like a high savings rate, a high trade surplus and huge wealth. Already now the franc is not a pure risk-off currency (read more).
Therefore the most probable scenario is that the EUR/CHF will fall to 1.10 or even lower, when global growth becomes stronger again. In phases of low global growth and high risk appetite that includes a carry trade possibility between EUR and CHF, like the current one – it may rise to 1.25 or more.
As we have seen above, the interest rate differential will follow the falling inflation rate differential sooner or later.
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