Friday, July 6, 2012

Euros keep pouring into Switzerland as the nation tries to fight deflation

With persistently strong demand for Swiss francs, Switzerland continues to face a deflationary environment. The CPI number once again came in negative, justifying Zurich's defense of the EUR/CHF peg.

Swiss CPI (YOY)

We know from Japan's experience that once deflation sets in (and deflationary expectations become part of the public's mind set), it is notoriously difficult for the central bank to fight. Switzerland simply can not afford to allow the Swiss franc to appreciate any further. In defending the peg the Swiss National Bank has to keep buying euros, raising its foreign currency reserves (which hit a new record) as the flight of capital into Switzerland (mostly out of the Eurozone) continues.

Swiss foreign currency reserves (latest number is CHF365bn; source: Bloomberg)
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