Swiss Inflation at 15 Year High - 50bp Hike in the Offing for the Franc?

[B]- Swiss Franc: Inflation hits a 15 year High

  • Euro: CPI prints in line
  • British Pound: Services slightly weaker, but remain expansionary
  • US Dollar: ISM Services on tap[/B]

Swiss Inflation at 15 Year High - 50bp Hike in the Offing for the Franc?
The EURUSD hugged the north side of the 1.3600 as the residue from yesterdays very soft ADP employment report continued to weigh on the greenback. Combined with the announcement from John Challenger that layoff plans by US corporations soared by 44% in April, the latest releases served to sour the currency market’s attitude towards the dollar as traders lowered their expectation of 100K+ increase in jobs in this Friday’ s NFP release. Nevertheless, dollar bulls continue to place their faith in today’s ISM Services release, most specifically the employment component which they hope will remain in the expansionary mode. Last month the ISM Services showed employment declining to 50.8 - within decimals of the 50 boom/bust line. If today the number breaks below that level, dollar bearish sentiment could swell as market players will assume the worst about tomorrow’s data.
On the other hand, not all employment data is dour. The Monster Index reported a 1 point increase in its gauge of labor demand for April, although the recruiting firm said that activity and demand for workers eased following two previous months of sharper gains. In general the NFP is notoriously difficult to handicap with the margin of error close to 100K, therefore revisions will be as important to the market as the headline number and may temper some of the bad news if they are adjusted upward.
For now the fundamentals clearly point in a dollar bearish direction, but technicals favor a bounce in the greenback as the EURUSD rally appears to be tiring quickly. Euro-zone data this week, including tonight’s inline CPI numbers has provided no additional fuel for further EURUSD rallies and the currency’s strength has now become strictly a function of dollar’s weakness. With market sentiment already broadly negative towards the dollar, traders will need to see near recessionary-like deterioration in US data to push the pair higher.
Meanwhile, Switzerland today recorded the highest month over month inflation in 15 years as prices skyrocketed by 1.1% versus 0.9% projected. While the mountain economy has enjoyed some the best economic performance in the industrialized world, running unemployment rates as low as 3% while registering very respectable 2.2% GDP growth, it’s low yielding currency, plagued by carry trade sales has fallen to record lows against the euro. That weakness in the Swiss franc is clearly putting pressures on prices, especially energy costs and the highly conservative SNB must be alarmed by what it sees.
Indeed SNB President Jean Pierre Roth recently noted that “We will continue increasing interest rates to the full extent that is necessary in order to preserve price stability in the medium term.” Many analysts believe that the 1.6500 EURCHF level represents the “line in the sand” for the Swiss Central Bank as it will not tolerate any further weakness beyond that point. With the cross having broached that barrier yesterday and with Swiss CPI now running much too hot for SNB’s comfort the market may now consider the idea of a 50bp rather than 25bp rate hike at the bank’s next meeting in June which should provide a much needed boost to the Swissie.