USD/CHF: Trading the Swiss Consumer Price Index Report

Trading the News: Swiss Consumer Price Index

What’s Expected

Time of release:                  02/10/2009 08:15 GMT, 03:15 EST

Primary Pair Impact :          USDCHF

Expected:                              0.6%

Previous:                               0.7%

Impact of the Swiss Consumer Price Index report had on EURUSD through the past 2 months

December 2008 Swiss Consumer Price Index

November 2008 Swiss Consumer Price Index

What To Look For Before The Release

How To Trade This Event Risk

The consumer price index for Switzerland is expected to show a weakening outlook for price growth as economists project the annual rate of inflation to fall to 0.6% in December from a previous reading of 0.7%, and the outlook for prices remains decisively to the downside as the International Monetary Fund forecasts a global recession for 2009. Fading demands from abroad has certainly taken a toll on the Swiss economy as it failed to grow in the third quarter, and conditions are likely to only get worse as trade conditions falter. The Swiss trade surplus narrowed to 0.22B from a revised reading of 2.25B in November, which was driven by a record breaking 13.3% drop in exports, while the downturn in trade pushed the annualized reading for producer and import prices to 0.4% from 1.1% during the same period. The data foreshadows a deepening a recession throughout the region, and as the risks for deflation intensify, the Swiss National Bank is likely to step up their efforts as policy makers forecast the annual rate of growth to contract 0.8% this year. As a result, SNB President Pierre Roth said that he expects ‘rate will remain low for a relatively long period of time’ at the World Economic Forum in Davos, Switzerland as the central bank attempts to steer the economy out of a recession, but as risk trends continue to dictate price action in the financial markets, the rise in the exchange rate could weigh on the export-based economy going forward. SNB Vice-Chairman Philipp Hildebrand said that the central bank may use ‘innovative and extensive monetary measures’ in an effort to restore confidence in the financial system during a speech in Zurich, and reinforced his earlier comments by stating that policy makers will utilize all the available tools to ‘fulfill’ their dual mandate to ensure price stability while fostering economic growth. Nevertheless, as investors continue to curb their appetite for risky assets, safe-haven flows are likely to strengthen the Swiss franc against its currency counterparts however, expectations for an intervention by the SNB could certainly limit the appeal of the low-yielding currency over the near-term.

Trading the given event risk may not be as clear cut as some of our other trades as investors weigh the likelihood for an intervention by the SNB, but as market participants project a weakening outlook for inflation, an unexpected rise in prices would certainly leave the door open for a fall in the exchange rate. Therefore, if the annualized CPI reading pushes higher or holds at 0.7%, we will keep an eye out for red, five-minute candle following the release to confirm a short entry on two lots of USDCHF. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance) and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, as fears for deflation intensify, the Swiss franc could face increased selling pressures following the event as market participants raise bets for the SNB to intervene in the currency market. As a result, if the annualized reading for inflation falls below 0.6%, we will look to go short the franc, and will follow the same strategy for a long dollar-franc franc trade as the short position listed above, just in reverse.