By Nicholas Hastings
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--The Swiss franc could start looking like a good buy.
Neither the violent conflict engulfing Israel and Lebanon nor evidence of higher inflation in the pipeline have lent the currency quite the support that might have been expected over the last few weeks.
In the first case, some analysts argue, the currency may have lost some of its safe-haven role. While in the second case, it appears that the market simply hasn't caught up with rate expectations.
"A 25-basis-point hike by the Swiss National Bank at the next quarterly policy conference in September is a done deal, but the economic development and, to a lesser extent, the inflationary development would suggest markets would be wise to start pricing in a greater probability of a more aggressive 50-basis-point hike," said Henrik Gullberg, a currency strategist with Calyon Corporate and Investment Bank in London.
"Current levels represent a good opportunity to buy the Swiss franc," he added.
How much the escalation of violence in the Middle East contributes to this more positive view of the franc remains difficult to tell.
The currency's dull performance in the last two to three weeks has suggested that it may have been losing its safe-haven role - in which investors traditionally buy Swiss assets as risk aversion rises.
"Given the recent tensions in the Middle East, as well as earlier market turmoil, some investors have been surprised that the Swiss franc has seemingly been unaffected and continues to trade relatively weak versus the euro," said Mike Buchanan, a currency strategist with Goldman Sachs in London.
But, Buchanan concluded, "we find that once expected interest rate differentials are allowed for, the Swiss franc has benefited from a safe-haven role."
"This analysis suggests that the current tension in the Middle East is keeping the Swiss franc stronger than would be the case in less troubled times," he added.
A similar study by Deutsche Bank over whether the franc is losing its safe-haven role comes to a similar conclusion. It isn't.
"We believe that the Swiss franc's status as a safe-haven currency remains solid," said Jens Nystedt, a currency strategist with the German bank in New York.
He reckons that financial shocks in May and June and the current hostilities in the Middle East have "so far not been of a comparable magnitude to previous risk aversion episodes."
Thus, he predicts, unless there is some bigger shock, the franc will continue to trade relatively sideways against the euro.
But some reckon that even without any safe-haven flows, the franc should still benefit on a purely economic basis, given that inflationary pressure in the country is steadily increasing.
Earlier this week, the June producer price index rose 2.6%, its fastest rise in 15 years, after rising 2.4% in May.
Calyon's Gullberg said the data "are consistent with a continued gradual increase in inflationary pressures at the consumer level over the next six months."
He suggested that this pressure will prove of some concern to the SNB given that it comes at the same time as economic activity remains robust and labor markets have been looking strong.
This Friday, the latest Kof survey of business expectations is expected to confirm just that, with the main index rising once again between June and July.
Deutsche Bank noted that although the rate of increase in the index may have slowed down it still suggests "robust GDP growth until well in the second half of 2006."
For the moment, though, an across-the-board rebound in the dollar, as the market reverses some of Friday's speculation over an accelerated appreciation in the Chinese yuan Friday, is helping to push the Swiss franc lower early Monday.
By 0645 GMT, the dollar had risen to CHF1.2434 from CHF1.2362, while the euro had edged up to CHF1.5713 from CHF1.5694.
The dollar is also up at Y116.61 from Y116.20, while the euro has fallen to $1.2638 from $1.2695.
Bloomberg TNI FRX POV
Reuters USD/DJ
Telerate 1066 or 1074
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 15 years. Apart from his written commentary and analysis, he also appears on CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: [email protected])
(END) Dow Jones Newswires
July 24, 2006 03:15 ET (07:15 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.
