Swiss franc calm as inflation drops

The Swiss franc is showing limited movement on Tuesday. USD/CHF is trading at 0.8507, down 0.11% on the day.

Swiss inflation declined to 1.1% y/y in August, down from 1.3% in the previous two months and below the market estimate of 1.2%. This was the lowest level since March, as prices for food, clothing and transport all decelerated. Monthly, CPI was flat, up from -0.2% in July and shy of the market estimate of 0.1%. Core CPI was unchanged at 1.1% y/y.

Inflation remains within the Swiss National Bank’s target of between 0 and 2%, as the sharp appreciation in the Swiss franc and dampened inflation and allowed the central bank to cut rates twice this year, bringing the cash rate to 1.25%. The strong upside pressure on the franc could prompt the SNB to cut rates by a quarter-point at its meeting on Sept. 26.

Swiss GDP surprised on the upside with a strong gain of 1.8% y/y in the second quarter. This was much stronger than the 0.6% gain in Q1 and beat the forecast of 0.9%. Monthly, the economy expanded by 0.7%, up from 0.5% and above the forecast of 0.5%. Manufacturing and services both improved in the second quarter, helping to drive GDP higher.

In the US, two manufacturing PMIs pointed to contraction, with readings below 50. The ISM Manufacturing PMI rose slightly to 47.2, up from 46.8 but shy of the market estimate of 47.5. Demand remains weak and the manufacturing sector has been in contraction mode for most of the past 18 months. The S&P Manufacturing PMI dropped to 47.9 in August, down from 49.6 in July and its first decrease in seven months.

• USD/CHF is testing support at 0.8513. There is weak support at 0.8489
• 0.8542 and 0.8566 are the next resistance lines