Switzerland’s producer and import prices fell 1.8% year on year in May, easing from a 2% decline in the prior reading. The data point to a slightly softer pace of deflation across goods at the factory gate and imported inputs.
The marginal improvement suggests cost pressures remained skewed to the downside, though the rate of decline moderated versus the previous month. The release provides an updated read on price dynamics feeding into supply chains and, by extension, downstream inflation in Switzerland.
Implications For Swiss Monetary Policy And Currency
The May producer and import price data, showing a smaller decline of -1.8% year-over-year, suggests deflationary pressures in Switzerland are bottoming out. For us, this reduces the immediate likelihood of another interest rate cut from the Swiss National Bank (SNB). We see this as a signal that the central bank may prefer to hold its policy rate steady at the current 1.25% for the time being.
Given this outlook, we are adjusting our currency positions, anticipating a firmer Swiss Franc in the short term. We will be looking at buying call options on the CHF against the Euro, as the European Central Bank continues its own easing cycle. Recent data showing the Swiss unemployment rate holding at a historically low 2.1% further supports the view that the domestic economy does not require more stimulus, which should underpin the franc.
Shifts In Market Strategies Amid Rate Expectations
This shift in expectations also impacts our view on interest rate derivatives. We believe the market has overpriced the probability of further SNB cuts this year, so we are reducing our long positions in SARON futures. Historically, the SNB has been reluctant to cut rates when facing a strengthening domestic picture, even with a strong franc.
We also see an opportunity in volatility markets, as uncertainty around the SNB’s next move will likely increase. We are considering buying straddles on the EUR/CHF pair, which would profit from a significant price move in either direction. Implied volatility for the pair has been suppressed recently, making options relatively cheap compared to periods of higher central bank ambiguity.
Looking ahead, this producer price index is a leading indicator for consumer inflation. The key data point now becomes the next Consumer Price Index release, which the market will watch for any sign of ticking above the recent 1.3% trend. A stronger CPI print would almost certainly put a halt to any remaining speculation of a summer rate cut.
