Tomorrow there are two events which could move the Swissie. The first is before the European markets open, with the release of the long-anticipated Q2 GDP data.
Normally this would drive the markets on its own. But given the strong demand for safe havens, it could have an extra impact this time. Then the SNB’s Chairman Jordan will be giving a speech later in the evening.
Switzerland’s economy has been facing numerous challenges lately. Chief among them is the slowdown in the world economy. But, more specifically, the slowdown in the eurozone, their largest trading partner.
Switzerland relies heavily on exports and capital markets. And the race to the bottom with interest rates around the world is likely to have a negative impact.
What We Are Looking For
The consensus among analysts is that the Swiss economy grew by 0.3% in the second quarter. This would b half the pace from 0.6% in the prior quarter. A result like this is not entirely unexpected since, during the first quarter, many Swiss firms reported that they were frontloading their investment programs.
With the change in global outlook during the second quarter, a good portion of capital expenditure went on hold, as reported during the recent earnings’ season.
On an annualized basis, expectations are for GDP to pick up the pace to 2.0% from 1.7% in the prior reading. While this is barely at replacement level, it’s still substantially better than Switzerland’s main trading partner, Germany. The lack of German growth is being blamed, in part, for Switzerland’s underperformance.
It’s Not Always Good to Be the Best
Swiss exports rely primarily on high-skill, high-technology products with an emphasis on luxury goods. With the global economy on shaky ground, often where costs are first cut is with luxury goods.
With the disparate results between the US and EU, the Swiss have been trying to switch their trading towards the Americas. However, they haven’t made significant enough of a change to support the GDP yet.
The other factor weighing on the economy is how the country is seen as stable and a good investment. Investors are desperate to find safe havens, like CHF-denominated assets. This has pushed the franc up, making it harder for Swiss exporters.
Politics Are Not Exactly Helping
Even as the world is facing the impacts of the trade war and Brexit, Switzerland and the EU are stuck renegotiating the terms of their relationship, with little progress. Both sides accuse the other of intransigence.
In fact, some tit-for-tat measures are already being taken. These include refusing to allow cross-border equity trading. The uncertainty of how that will play out over the next year is a factor keeping some investors wary.
On a positive note, however, Switzerland is about to sign a free trade deal with Mercosur. This will broaden its export reach while providing access to cheaper raw materials. There is even talk that the UK might join the EFTA after Brexit.
Switzerland has a solid reputation among investors. Therefore, it would take a severe miss of expectations to knock down market sentiment. As long as Switzerland is performing better than Germany (not a hard feat at the moment), generally we could expect the CHF to be bolstered by the results.