Local and National Provision for Swimming.
BUSINESS P700
BUSINESS, GOVERNMENT AND
THE GLOBAL ENVIRONMENT
CURRENCY REPORT
SWISS FRANC
Word Count: 1000 words plus
appendices, references and
table of contents
TABLE OF CONTENTS
HISTORICAL OVERVIEW 1
EXCHANGE RATE ANALYSIS 1
TWELVE-MONTH FORECAST 3
APPENDICES 5
FIGURE 1: SELECTED ECONOMIC DATA 5
FIGURE 2 THE EXCHANGE RATE OF USD/CHF 6
FIGURE 3: EXCHANGE RATE FORECAST USD/CHF 6
FIGURE 4: FORECAST TECHNICAL ANALYSIS 7
REFERENCES (ENDNOTES) 8
CURRENCY REPORT: SWISS FRANC
HISTORICAL OVERVIEW
Switzerland has been an independent country since August 1, 1291. It joined the United Nations in September 2002, and its long history of neutrality has made it the world's largest destination for offshore capital. With its world renowned bank confidentiality, capital flows tend to drive the economy during times of global risk aversion while during times of global risk, trade flows are the major drivers1. Main exports, imports and trading partners are evident in Figure 1. Lacking natural resources it has developed labour skills and technological expertise for the manufacturing industry. This has allowed Switzerland to attain one of the highest living standards in the world for its 7,450,867 residents.
EXCHANGE RATE ANALYSIS
The exchange rate of USD/CHF from Oct 2002 to Oct 2004 is steadily rising, with five wavy segments (Figure 2). The CHF appreciated from 0.67 to 0.85. Internal factors of GDP growth, SNB's monetary policy, inflation rate, etc. and external factors of the U.S. economic climate and the Iraq war all contribute to increasing the demand for the Swiss Franc.
October 2002 through May 2003: the CHF appreciated from 0.68 to 0.77 due to: (1) Better than expected GDP growth rate in Switzerland for the 4th quarter (+1.4%2) of 2002. (2) A stable consumption, boosted exports of higher trade surplus (+4.8% of exports vs. -1.6% of imports in 4th quarter3), and a large current account surplus. (3) More expansive monetary policy (e.g., the three-month Libor rate falling from 0.59% in February to 0.29% in May4) to support economic recovery. (4) Low yearly inflation rate of 1.0% for both 4th and 1st quarters5. (5) External factors including: a widened budget and trade deficit, the outbreak of the Iraq conflict, sharp rise of the oil price, and slowed US GDP growth in the fourth quarter (+1.4%6) of 2002 and first quarter (+1.9%7) of 2003 resulted in the USD depreciation.
June 2003 through Early September 2003: During this period, the exchange rate depreciated from 0.77 to 0.70 due to: (1) Decreased real GDP of -1.0%8 in 2nd quarter (2) Continual recession of investments and exports (-1.0% for 2nd quarter9). (3) Widened differential interest rate between CHF and USD from 0.92% in June to 1.41% in August10. (3) External factors for the USD appreciation including the end of the war in Iraq, improved US economy with real GDP rising by 3.1%11 in the second quarter compared with 1.4% in the previous quarter.
October 2003 through February 2004: ...
This is a preview of the whole essay
June 2003 through Early September 2003: During this period, the exchange rate depreciated from 0.77 to 0.70 due to: (1) Decreased real GDP of -1.0%8 in 2nd quarter (2) Continual recession of investments and exports (-1.0% for 2nd quarter9). (3) Widened differential interest rate between CHF and USD from 0.92% in June to 1.41% in August10. (3) External factors for the USD appreciation including the end of the war in Iraq, improved US economy with real GDP rising by 3.1%11 in the second quarter compared with 1.4% in the previous quarter.
October 2003 through February 2004: Over this period CHF appreciated from 0.76(USD/CHF) to 0.81 (Figure 2). This was due to: (1) the continual recovery of the Swiss economy in the fourth quarter of 2003 (GDP +1.8%) and during the first two months of 2004. This was a result of increased domestic demands and boosted exports. (2) The SNB was pursuing an expansionary monetary policy. However, this money supply increase was offset by a lower interest rate. The 3-month LIBOR rate remained constant at 0.5%12. (3) The inflation rate also decreased at this time. The national consumer price index, measured by overall CPI, fell from 0.5 in Oct 2003 to 0.1 in Feb 200413. Purchasing Price parity (PPP) theory shows that a lower inflation rate causes the Swiss Franc to become more valuable.
February 2004 through April 2004: The Swiss Franc decreased slightly from 0.81 to 0.76 (Figure 2). The prospect of an interest rate hike by the U.S. Federal Reserve board made the dollar more attractive to investors.
April 2004 through October 2004: CHF appreciation quickly resumed. This was fuelled by a 2.0%14 GDP growth rate. The SNB's expansionary monetary policy was again implemented without raising the inflation rate. Meanwhile, the U.S. was hoping a depreciated dollar would stimulate exports and decrease its trade deficit. However, the rate decreased to 0.78 in July and August. The rates for ten-year government bonds climbed from below 4.0% in mid-March to more than 5% in May15. Therefore, a marked rise in the U.S. capital market yielded an increased dollar.
TWELVE-MONTH FORECAST
It is predicted that the Swiss franc will maintain the current upward momentum for the next six months, peaking at USD 0.93 per CHF (Figure 3). The SNB will then intervene to halt this trend and allow the exchange rate to move at a significantly slower pace or even retreat (Figure 3). The rate will fluctuate between 0.96 and 0.85 in 2005. The following fundamental analysis justifies our forecast.
Overall economic outlook: The GDP growth rate will continue to 1.8% in 2004 and 2% in 2005, which will backup the appreciation.
Money supply growth rate: The SNB's easy monetary policy in 2003 did not result in price increases and avoided depreciation in CHF. As in 2004, the SNB will continue a tightened monetary policy for 2005. This will further diffuse its depreciation.
Inflation rate: Because of its monetary expansion adopted in the wake of an accommodative policy to minimize price pressures, the inflation rate will be around 0.4% in 2004. With a tightened policy, the central bank predicts that inflation will be no more than 1% in 2005.
Interest rate: The SNB will pursue to end its near-zero short-term interest rates and 2.6% Confederation's ten-year bonds. On a 12-month horizon, we expect that the three-month Libor will be raised to 1.5% and the ten-year government bonds to 3.3%. The rise of interest rates will have some adverse impact on the upward trend, especially for the remaining six months.
Balance-of-payment: Forecasted exports of goods and services will be 4.3% this year and 3.0% in 2005. Imports will also increase significantly from last year's 1.4% to 4.2% in 2004 and to a slightly weaker 2.6% in 2005. Therefore, balanced exports and imports will not apply pressure on the currency's fluctuations.
The current upward trend will be halted in June, 2005 due to two factors: (1) SNB's likely policies designed to benefit its exports and ease pressures for its economic life. (2) Loan statistics underscoring the positive momentum. Loans to Swiss companies increased from 662 billion in 2002 to 695 billion in June 2004, and more over the past few months.
APPENDICES
Figure 1: Selected Economic Data
MAJOR EXPORTS (2002)
% OF TOTAL
MAJOR IMPORTS (2002)
% OF TOTAL
Chemicals
34.4
Machinery & electronic devices
21.1
Machinery & electronic devices
24.3
Chemicals
22.1
Watches
8.2
Vehicles
10.4
Metals
7.5
Textiles, clothes & shoes
7.0
Precision instruments
6.8
Precision instruments, watches, jewellery
6.6
LEADING MARKETS (2002)
% OF TOTAL
LEADING SUPPLIERS (2002)
% OF TOTAL
Germany
20.8
Germany
32.3
US
11.0
France
10.4
France
9.2
Italy
10.8
Italy
8.3
Netherlands
5.4
UK
4.9
US
5.3
Source: Country ViewWire from the Economist Intelligence Unit (http://www.economist.com/countries/Switzerland/PrinterFriendly.cfm?Story_ID=2455271) Accessed December 1, 2004
Figure 2 the Exchange Rate of USD/CHF
Source: OANDA, "Fxhistory-historical Currency Exchange Rates", OANDA, URL: http://www.oanda.com/convert/fxhistory (accessed Nov 20, 2004)
Figure 3: Exchange Rate Forecast USD/CHF
Figure 4: Forecast Technical Analysis
Technical Analysis:
USD/CHF is in a downtrend directed by daily exponential moving averages (blue line). Bollinger bands (yellow line) are drawing the trend and RSI (Relative Strength Indicator) is in a bearish configuration. The downtrend should continue on 1.12 supports. Overall, the Swiss Franc still offers little value below 1.18 levels against the US currency even though the dollar will struggle to make significant gains. The Franc should also hit tough resistance beyond the 1.5250 level against the Euro. The decline in oil prices and market interest in global equities should lessen the short-term support for the Swiss currency. There is also speculation that the SNB will protest against currency strength. This should offer some US currency support below the 1.18 level.
REFERENCES (ENDNOTES)
DailyFX.com (http://www.dailyfx.com) accessed December 4, 2003
2 Swiss National Bank, Quarterly Bulletin, March 1/2003, Volume 21 p.4
3 Ibid, p.27
4 Swiss National Bank, Quarterly Bulletin, June 2/2003, Volume 21 p. 9
5 Ibid
6 Swiss National Bank, Quarterly Bulletin, March 1/2003, Volume 21 p.13
7 Swiss National Bank, Quarterly Bulletin, June 2/2003, Volume 21 p.15
8 Ibid, p.4
9 Swiss National Bank, Quarterly Bulletin, Sep 3/2003, Volume 21 p.27
0 Ibid, p17
1 Ibid, p.13
2 Ibid, p.23
3 Ibid, p.34
4 Monetary policy for 2004, (As of June 2004) p.4
5 Monetary policy for 2004, (As of June 2004) p.27
Swiss Franc - Currency Analysis
P700 - Business, Government & the Global Environment
