Switzerland faces mild deflationary pressure as December PPI fell -1.8% y/y and January CPI barely stayed positive at 0.1%, keeping markets alert to potential SNB rate cuts. Weak manufacturing activity, illustrated by a December PMI of 45.8, adds to economic headwinds, though safe-haven flows are expected to underpin the Swiss franc, supporting EUR/CHF around 0.92, Rabobank's FX analyst Jane Foley reports.

EUR/CHF supported by safe-haven flows despite domestic weakness

"In terms of Switzerland’s domestic economic backdrop, market pricing points to ongoing risk that the SNB may drop rates back below zero in the coming months. December PPI inflation recorded a -1.8% y/y fall, which points to the deflationary risks in the country. Last week’s release of Swiss January CPI inflation data at an as expected 0.1% y/y showed that headline inflation continues to cling to positive territory, but only just."

"The December measure of Swiss manufacturing PMI at a disappointing 45.8 is illustrative of economic headwinds in the country. Since the SNB only schedules four policy meetings a year, the next one is not until March 19. At the December meeting, the SNB forecast that Swiss CPI inflation would remain within the range of its price stability target of 0% to 2% over its entire forecast horizon, based on the assumption that it kept its policy rate at 0%."

"It is possible that policymakers will become more dovish given the current threat of a step up in trade tensions between the EU and the US which would have negative consequences for the Swiss economy. That said, even under this scenario we would expect that safe haven flows would continue to keep the CHF well underpinned. We retain a 3-month forecast of EUR/CHF 0.92."