Demand for the Swiss Franc has been on the rise over the last week as global stock market volatility continued. Although Tuesday’s fourth quarter Chinese GDP report showed that growth within the world’s second largest economy had fallen to its lowest level in twenty-five years, markets initially saw a surge in risk appetite, as traders bet on the likelihood that Beijing would be prompted to introduce fresh economic stimulus. However, it was ultimately not long before an atmosphere of risk aversion returned, bolstering the Franc as investors became more skittish over the seemingly more fragile nature of the global economy.
The Swiss economy certainly appeared to be experiencing the results of negative global headwinds, as December Producer and Import Prices printed at a weaker level than forecast. At -5.5% on the year this did not seem to bode particularly well for the inflationary outlook of the domestic economy, putting fresh downwards pressure on the Franc. Nevertheless, the initial negative impact of this softer figure was soon outweighed as safe-haven demand shored up the currency.
While the GBP/CHF exchange rate had equally been bolstered by a minor uptick in the December UK Consumer Price Index, which rose from 0.1% to 0.2% on the year, the pairing soon saw a sharp slump in response to comments from Bank of England (BoE) Governor Mark Carney. Echoing the more dovish tone of the BoE’s recent policy meeting, Carney refused to put a timetable on the central bank’s monetary policy while also suggesting that interest rates were likely to remain low for some time to come. Apparently dashing pundits’ hopes of a second or third quarter rate hike, this more cautious commentary caused some economists to suggest that monetary tightening might not materialise until 2017.
Although the ILO Unemployment Rate unexpectedly dipped to a ten-year low of 5.1% on Wednesday, following a -4,000 decline in the number of unemployment benefit claims in the UK, this was ultimately not enough to restore the strength of the Pound. Investors were primarily concerned with the greater-than-expected slowing in Average Weekly Earnings, which rose by 2.0% in the three months to November, as policymakers had previously highlighted the need to see stronger wages before opting to raise interest rates.
However, the Swiss Franc soon softened when the ZEW Economic Sentiment Index demonstrated that business confidence had dropped markedly from 16.6 to -3 in January. While this reflected the more general market atmosphere this increasing apprehension prompted the GBP/CHF currency pair to return to an uptrend, in spite of the relative bearishness of the Pound.
In the wake of more dovish commentary from European Central Bank (ECB) President Mario Draghi, the Franc has declined further across the board as the prospect of further monetary loosening helped to weigh on demand for the Swiss currency.
Ahead of the weekend the GBP/CHF exchange rate may regain more ground as traders anticipate that the UK’s latest Public Sector Net Borrowing figure will show a narrower increase in new government debt.