Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)
We’re seeing a meaningful inflection in the CHF-EUR, down -5.0% year-to-date, an added benefit for a country whose exports represent 55% of GDP. With an expedient gain of +19.3% in the CHF versus the EUR in 2010 -- and considering that the Eurozone is Switzerland’s main export partner -- the weakening in the currency comes as a great relief to exporters, but also the Swiss National Bank (SNB) that attempted to weaken the CHF last year, but ran into snags with 1.) the inability to cut below its main benchmark interest rate of 0.25%, and 2.) sovereign debt fears in the Eurozone that buoyed safe haven currency plays like the CHF.
Although the inverse correlation between the CHF-EUR and Swiss Market Index (equity) is not extremely high (-0.34) since 12/31/09, the trend line suggests a positive bias in the equity market to a weaker CHF.
[Of the major currencies versus the EUR, only South Africa’s Rand is down more than the CHF year-to-date, at -10.2%.]
Yesterday, Swiss CPI declined sequentially to +0.3% in January Y/Y versus +0.5% in December, bucking the trend of rising inflation we’re seeing across Europe. From a comps perspective, CPI should remain benign in 1H2011.
4Q10 GDP has yet to be released, however average Bloomberg forecasts suggest +2.6% Q/Q, a sequential slowing from +3.1% in Q3. We’re cautious on the country’s growth profile given that its main trading partners in Europe are working through austerity programs that are cutting spending, increasing taxes, and dampening confidence, whereas an important export market like Germany is showing fundamental signs of rolling over. Comps get increasingly more difficult beginning in Q1, and Bloomberg consensus forecasts +1.7% annual GDP growth in 2011.
We’re not currently invested in Switzerland and remain cautious on Europe’s underlying debt and deficit imbalances. This week showed a reversal in European equity market performance, with the PIIGS underperforming their European peers after an exuberant start to the new year, whereas the credit markets continue to reflect a heavy risk premium to own Europe's periphery.
The European Summit on March 24-25 remains a main catalyst that we're managing risk around in Europe. Stay tuned.