CHF, growth with no inflation in near term

There is now hard evidence of something we have previously heard anecdotally, since January, interest in CHF has dropped off sharply. Average daily turnover in CHF showed a noticeable fall in the latest semiannual FX turnover surveys. 

"But over the last month, EUR/CHF made a push towards the top of its 1.02/1.07 trading range. Though it has since partly retraced, the conditions are ripe for investors to carefully reposition in EUR/CHF. EUR/CHF is expected to gradually trade higher", says RBC capital markets. 

The driving factor behind the view is Switzerland's inflation outlook which will allow the SNB to keep its nominal rates lowest in the world. While its real rates are amongst the highest in G10, it is seen before that nominal rates are more important in driving spot FX returns. 

Switzerland's economic outlook is far better than one might assume given the sharp appreciation in its currency. The KOF survey shows that the Q1 contraction inGDP following the break in the floor is likely to be shortlived. July's KOF survey jumped 10pts. In late 2011 the KOF had also fallen sharply as CHF had appreciated rapidly before the SNB put the 1.20 floor in place, but

This time the currency remains rich but activity is rebounding. In part it is because Swiss firms are finding export markets outside the Euro area (the share of exports to the EZ dropped from an average 40% to ~35% in Q1). But the weak inflationary outlook renders activity data irrelevant - the SNB is not tightening anytime soon. 

"Meanwhile if risk appetite improves, EUR/CHF should make small gains", added RBC.