Home Fundamental Comment Swiss franc retreats despite upbeat PMI manufacturing data

Swiss franc retreats despite upbeat PMI manufacturing data

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Map and flag of Switzerland with collage of colourful Swiss franThe Swiss franc retreated against the euro and dollar on Monday despite a report showing improvement in manufacturing activity in May, amid the SNB’s desire to weaken the currency.

A report released on Monday showed a rise in PMI manufacturing to 49.4 in May from 47.9, better than forecasts of 48.4.

The upbeat figures raised hopes the economy is recovery after the contraction in the first quarter on the back of the SNB’s removal to the cap against the euro.

Gross domestic product in Switzerland dropped 0.2 percent in the quarter through March, raising concerns it may enter a recession, which means shrinking for two consecutive quarters.

The SNB abandoned its 1.20 cap versus the euro on January 15, causing the franc to edge up 13.25 percent against the single currency during the first quarter.

The export-reliant economy registered a 2.3% fall in its exports in the first quarter, while imports rose 0.4 percent.

Despite the slash in benchmark interest rate to 0.75 percent and charge on major cash deposits held with the central bank, the franc has strengthened since January 15.

Meanwhile, Swiss policymakers aim to make their currency weaker to bolster overseas sales and thereby growth.

“The franc is significantly overvalued and should therefore weaken over time,” Swiss National Bank’s Chairman Thomas Jordan said on Saturday.

“Whether we need to go lower with the negative rates depends on international developments,” Jordan mentioned.

Recently, the euro has faced some downside pressure on the back of the debt crisis in Greece, while the dollar advanced on expectations of seeing an interest rate hike this year.

As of 11:15 GMT, the EURCHF traded higher at 1.0328, while the USDCHF rose to trade around 0.9458.

At the meantime, most central banks aim to make their currencies weaker to bolster growth, which raises a key question: Is the global economy on the brink of a currency war?

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Ahmed Mamdouh Ahmed Mamdouh, Co-Founder and Head of English Fundamental Analysis at FXComment.com, with 7 years of experience in the financial markets. Mamdouh holds a Master’s Degree in Economics from The American University in Cairo and a Bachelor Degree in Economics from The Faculty of Economics and Political Science, Cairo University.

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