SNB, Nokia and the end of Deflation

Switzerland reported earlier today that Q2 GDP expanded by 0.5%, which was sufficient to lift the year-over-year rate to 2.5% from 1.2% in Q1. This is the strongest year-over-year pace since Q1 2011.

The market had expected a 0.3% increase on the quarter. However, what appears to have captured the market's attention today is the Swiss National Bank's equity holdings. In particular, the SNB appears to be the fifth largest holder of Nokia shares (0.6%). News of Microsoft acquisition of Nokia's patents and device services is lifting the shares by about a third today and creating a windfall for the SNB.

However, in the grand scheme of things, this is small beer for the SNB. The value of its Nokia holdings was estimated at about 45 mln euros at the end of March. Since then, and including today's advance, the shares have gained about 75%. That would put its value now near 70 mln euros, while the SNB's overall reserves at the end of July was estimated at almost 435 bln euros.

The SNB has disclosed that about 15% of its reserves are held in equities and that it mimics some industry benchmarks. New reserve figures are due out at the end of the week, the same day the August CPI figures will be reported. September 6 is also the two-year anniversary of the imposition of its cap on the franc against the euro (CHF1.20) Even though the it has meant a vast accumulation of reserves (holdings now about 75% of GDP), it be yielding fruit. The economy is recovering and deflation is being beaten back.

The national figures showed that the two-year deflationary period may have ended. In July as the headline ear-over-year rate was not negative for the first time since September 2011. Using the EU harmonized methodology, the July year-over-year rate was 0.5%. If the August reading matches this, as the consensus expects, it will be the third consecutive month of inflation.

The Swiss National Bank meets on September 19th, a day after the FOMC meeting. The SNB is unlikely to change its stance or its franc cap. However, as the economic recovery in the euro area gains traction (and here we note the rise in the forward looking new orders component, which stands at a 2-year high for manufacturing), the risk of a existential crisis eases, while domestic price pressures gradually increase, an exit from the peg is possible in 2014, but of course SNB officials will say it is needed until it is not.

Meanwhile, the dollar has approached the CHF0.9400 area, which marked the  upper end of the greenback's range since late July..  A convincing break could see CHF0.9500 or a bit above.  For the better part of the past two months the euro-Swiss cross has, with a few exceptions, been largely confined to a CHF1.23-CHF1.24 range.  

With sterling advancing against the euro, on the back of impressive economic data, there is much interest in long sterling short franc positions.  The recent  high was set in May just above CHF1.48 and that is the next immediate target, but some are looking at a run to the year's high set in mid-January near CHF1.50.

Separately, we note that while the euro and franc are highly correlated (~0.90, on a 60-day rolling basis, conducted on percent changes), the more impressive development this year is that the franc, which was inversely correlated with the yen for much of Q1, switched by the middle of Q2 to be positively correlated and increased through early Q3.  It stands at 0.71 over the past sixty day period.  Over the past 30-day is has been even higher at almost 0.79.