According to the Swiss National Bank (SNB), inflation is returning to negative territory in 2015. In its December 11, 2014 assessment of monetary policy, the SNB once again adjusted its inflation forecast downward.
Inflation goes negative in 2015 for Switzerland
Source: Swiss National Bank
The succession of downward forecasts for inflation make rising inflation in outer years look more and more optimistic. Despite the best efforts of the SNB to guard its 1.20 floor against the euro (NYSEARCA:FXE), inflation has proven next to impossible to resurrect in Switzerland. The currency market's trigger response to the statement was to actually strengthen the Swiss franc (NYSEARCA:FXF) despite the SNB's standard warning that "…the Swiss franc is still high." At the time of writing, the Swiss franc got as low as 1.20169 (and dropping) in the EUR/CHF currency pair in the immediate wake of the policy statement.
EUR/CHF drops toward the 1.20 SNB floor in the wake of the December monetary policy assessment
The SNB's challenge is that the European Central Bank will likely continue easing monetary policy which should in turn continue pressuring the euro lower. The SNB acknowledged this issue indirectly by forecasting weakening economic conditions for the eurozone (in three separate locations in the statement) that certainly imply the euro will continue trending lower. However, the SNB did not mention any additional measures it may implement to stave off the importation of deflation from the eurozone through the EUR/CHF currency pair.
There was also no mention of the SNB's "victory" over the "Save Our Swiss Gold" referendum which would have surely made it next to impossible for the SNB to prevent a deepening of deflationary pressures in the economy. On November 17, I laid out a trading strategy for playing the outcome of this vote with the assumption that odds were against the initiative passing. It was a trade that went long the Australian dollar (NYSEARCA:FXA) against the Swiss franc and long SPDR Gold Shares (NYSEARCA:GLD). The initiative failed as expected but the aftermath was quite mixed.
As the chart above shows, the Swiss franc barely weakened. The gain in AUD/CHF was muted by much larger pressures on the Australian dollar that have sent it ever lower against all major currencies. One might fairly ask why not play EUR/CHF directly. Because my current trading strategy on the euro features fading rallies, I did not want to hold a position directly long the euro. In the end, EUR/CHF was indeed the best currency play on the referendum. EUR/CHF was even at a pre-vote low when I wrote the piece.
GLD gapped down on the Friday before the vote and surged higher the Monday after the vote. The overall change was marginally higher, but I certainly did not anticipate that gold would lose as much as it did right before the vote.
The rally in SPDR Gold Shares off the recent lows has continued into December
In choppy fashion, GLD has continued higher. This move likely has little to nothing to do with the Swiss vote which would have bolstered the price of gold. Gold has gone higher even as the U.S. dollar index (NYSEARCA:UUP) has marginally trended higher and commodities in general have continued to sell-off on global markets. Of interest to me then is gold's move higher along with the improving "buy gold" sentiment I demonstrated in the piece on trading the referendum. The spike on December 1st also happens to coincide with what is increasingly looking like the beginning of some topping action in the S&P 500 (NYSEARCA:SPY).
Going forward, I remain bearish on the Swiss franc. This bearishness is effectively an extension of bearishness on the euro. As the euro goes lower one outstanding question is what measures will the SNB take "immediately" in the face of "an undesirable tightening of monetary conditions."
Be careful out there!
Disclosure: The author is long GLD.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In forex, I am short the Swiss franc.