At the end of this week Swiss Jan CPI inflation data will be released.  The market is expecting the EU harmonised number to register -0.7% y/y down from -0.4% y/y in Dec.  Deflationary conditions it seems are getting worse in Switzerland.  This is not the only problem for policy-makers; recessionary conditions in much of the Eurozone threaten the position for exporters already troubled by a strong CHF. 

The January release of PMI manufacturing showed a shockingly large drop to 47.3, suggesting that the sector is clearly in contraction territory.  It is against this backdrop that the SNB’s new interim head Jordon used yesterday’s speech to make clear that the SNB would not drop its commitment to the EUR/CHF1.200 floor.  Pressure on EUR/CHF in recent weeks has coincided with speculation that the recent change in the leadership at the SNB could herald a change in policy. 

However, not only is there no economic reason for the SNB to drop what has been a very successful policy, but a change in course at this juncture could be devastating for the SNB’s credibility and could impact damage which could take years to repair.  In view of the absence of any inflation risk the SNB are well positioned if they need to turn on the printing presses in order to defend their position. 

However, it seems that in recent months this threat, rather than large amounts of intervention, has been sufficient to keep speculators at bay.  In fact CFTC data suggest that despite the push lower in EUR/CHF this year that speculators are content to maintain their CHF shorts.  We continue to view dips in EUR/CHF as buying opportunities.  
 

source: Rabobank