Swiss Miss: 2011 Trade Surplus Jumps, Market Careful of SNB

Switzerland reported a CHF2.07 bln trade surplus in December. Although this was somewhat less than expected, the trade surplus for the year was about CHF24 bln which is almost 20% larger than 2010. Of note, half the export growth appears to be accounted for by German demand. Also luxury watch exports to Asia were up strongly.

The strength of the franc did not hurt exports, but the domestic economy is in poor shape as yesterday's PMI illustrated. It fell to 47.3 from a downwardly revised 49.1 (was initially 50.7). In addition, deflationary forces appear to be strengthening.

It is in this context that the market appears to be shying away from a full frontal assault to the SNB's cap on the franc. Since the middle of December, ideas that the SNB would lower the cap further have waned and stale euro longs have been cut. The euro has fallen almost 3% against the Swiss franc to near the CHF1.20 SNB level. As this level was approached, the market has begun talking about how and where the SNB will make is desires known.

Some fear a trap whereby the SNB allows the euro to fall through CHF1.20 and then come in a drive it back. Others argue the SNB risks losing credibility (that and the relative small size of the CHF market are the two big considerations that differentiate it from the BOJ) if the CHF1.20 level is breached.

Just as we argued against those who thought the SNB would lower the CHF cap, we think it will defend the current cap, not because of exports, but because of its domestic economic considerations.