U.S. Markets open in 2 hrs 32 mins

Swiss Inflation Cools as SNB Held Off on Franc Intervention

Benjamin Spier

THE TAKEAWAY: Swiss inflation falls to an eight month low of -0.6% -> Drop in inflation follows a pause in the rise of SNB foreign currency reserves -> Franc drops slightly

Swiss inflation fell to an eight month low in March, following a period where the SNB cooled its Forex intervention as the Franc lost value against a strengthening Euro. Swiss consumer prices declined 0.6% from March 2012, lower than expectations for -0.5% inflation and down from the -0.3% rate in February. Consumer prices rose 0.2% over the month of March, according to the Federal Statistics Office.

Swiss inflation has been pushed down since 2011 largely by the flow of liquidity into the Franc by investors looking for a safe haven from the suffering Euro. In reaction, the SNB has reinforced a 1.20 cap in EUR/CHF trading since September 2011, through sales of an unlimited supply of the Swiss Franc.

The SNB’s foreign currency reserves rose from 250 billion Euro to 400 billion in 2012, because of the intensified Forex intervention, which helped bring Swiss annual inflation from a 3-year low of -1.1% to a yearly high of -0.2% in 2012. However, the SNB was able to largely hold off on foreign currency purchases, as the Franc naturally depreciated during the Euro rally at the end of 2012. It was that pause in Franc selling that most likely allowed inflation to fall back to the eight month low in March.

Earlier today, SNB President Jordan said the central bank’s exit from the Franc cap is still far away, and in March we saw the highest rise in six months in the foreign currency reserves. Lower inflation allows the SNB to further sell off the Franc without worrying about increases in local prices.

That’s why the Euro rose slightly against the Franc following announcement of the worse than expected drop in inflation. EUR/CHF is trading slightly below 1.2190 at the time of this writing, and the pair may next see resistance at 1.2200, by the 76.4% retracement of the rise from the January low to the January high. Support might be provided at 1.2130, by the 200-day moving average.

EURCHFDaily: April 09, 2013

Swiss_Inflation_Cools_as_SNB_Held_Off_on_Franc_Intervention_body_eurchf.png, Swiss Inflation Cools as SNB Held Off on Franc Intervention

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.