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What to Look For in Swiss Q1 GDP

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The CHF is in for a busy week, with the most important figures coming out tomorrow before European traders get to their desks.

Switzerland is one of the last major countries to report their GDP. But, it doesn’t mean it won’t provide some volatility for the markets. Last time around, the Swiss narrowly avoided a technical recession. However, the outlook isn’t so good this time around.

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What We are Looking For

Tomorrow morning there are two major events. At 07:45 CET (01:45 EST), we have the GDP figures. Then, just fifteen minutes later we have the trade balance. Both have a habit of propelling the Swissie in a new direction. The fact that they are both coming in so close to each other right before the equity market open in Europe means it’d be a good idea to keep a close watch on them.

Later in the week, we have the KOF economic barometer. It is expected to keep its sideways trajectory in contraction territory around 95. While this isn’t good, it seems to have stopped the decline that it was registering all year. But, if we get some disappointment from the GDP and trade numbers, that might change. The week closes out with retail sales. The data is expected to remain in negative territory also.

The Main Issue

There isn’t a solid consensus on what to expect from the Swiss GDP. While there is a preponderance of analysts projecting a negative result, there are still quite a few who have a more upbeat outlook. Officially, the expectation is for Q1 Swiss GDP to contract by 0.6%. However, this is the bottom of a range offered by analysts which go as high as +0.2%.

With such a wide range, we could see some extra market volatility if the result comes within it. It’s likely that a result above 0.2% would be interpreted as strengthening for the CHF. We could see some extended weakness in the Swiss currency if the GDP comes in below -0.6%.

Why the Discrepancy?

The issue comes down to trade. Last quarter’s growth was driven almost entirely by trade. Optimistic analysts are pointing to Switzerland’s above average trade surplus during the first three months of the year. The main exports have continued to perform well, as reported by Richemont, Swatch and Roche during their quarterly earnings reports. A positive trade balance is usually seen as support for the currency.

On the other hand, the trade balance is being attributed to the slackening of imports. Exports are actually underperforming. While the cash flows would be positive, the underlying economic performance might be such that the positive contribution from the trade balance isn’t enough to push the GDP into positive territory.

Swiss External Dependency

The overriding problem that Switzerland has now is that the largest component of its economy is trade with other countries. Their trade is mostly with Europe, who are having economic difficulties. Switzerland’s major industry, finance, has been chronically under pressure. The reason for this is due to regulatory increases, low-interest rates, and a lack of global profitability.

In such a scenario, the long-term trend of the CHF seems to have more to do with safe haven interest than the underlying economic performance of the economy. Because of Switzerland’s reputation, their currency could remain strong despite lackluster economic news. This would be precisely because what’s causing the poor economic performance is what makes their currency attractive: global geopolitical uncertainty.

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