Pull up a 1-year chart of the Euro against the Swiss Franc, and you’ll quickly notice a salient trend: the exchange rate has hovered slightly above €1.50 since last March, with three notable deviations. The first occurred last March, when the Swiss National Bank (SNB) intervened in currency markets on behalf of the Swiss Franc, causing the Franc to shoot up instantly by more than 5%. The second took place in June, when the SNB threatened (it may or may not have actually intervened) intervention again, and the Franc shot up in order to create a buffer zone. The final deviation can be seen at the end of December, when a generalized decline of the Euro also manifested itself against the Swiss Franc, as it fell significantly below the €1.50 threshold.

It’s not clear whether €1.50 was ever conveyed by the Swiss National Bank explicitly, or whether it was merely accepted implicitly by the forex markets. Regardless, traders certainly respected this boundary, and for most of 2009, dared not challenge it. At the end of December, as I said, there were two important developments, which bore on the EUR/CHF cross. First, credit downgrades and the (far-off) prospect of sovereign default in the EU set loose a wave of panic, after which the Euro has generally fallen. The second development was a subtle change in the wording of the SNB’s forex policy. Previously, it had promised to prevent any “appreciation” in the Swiss Franc, whereas now it is only interested in stopping an “excessive” appreciation.

It’s not clear whether the Swiss Franc suddenly blasted through the €1.50 because investors believe(d) it was undervalued, or if instead it merely got caught up in the Euro’s weakness. Perhaps, investors realized that now they had an excuse to sell the Euro and no longer had to worry about whether actually doing so would risk provoking the SNB. It was probably a combination of both.

For its part, the SNB (through its President and chief mouthpiece Philipp Hildebrand) is already sending subtle clues to the forex markets about the Franc’s prospects. Hildebrand recently told reporters both that “Raising interest rates would be inappropriate,” and “Since the recovery is still fragile, the current expansionary monetary stance will need to be maintained until the recovery strengthens and deflationary pressures recede.” In other words, those that bet on Franc’s appreciation shouldn’t expect any return on their investment, in the form of higher interest rates.

He also reiterated the SNB’s stance on the Franc more explicitly: “Our policy is clear: we will resolutely prevent an excessive appreciation as long as there are deflationary risks.” Given that the markets called his bluff in December, investors are unfazed: “The difference in the number of wagers by hedge funds and other large speculators on an advance in the franc compared with those on a drop, so-called net longs, was 13,926 on Jan. 12 compared with net shorts of 2,780 a week earlier.”

In all likelihood, the Franc will continue to hover around €1.50, only below that barrier, rather than above it. As long as the Franc remains basically stable, either in literally not moving, or in appreciating at a snail’s pace, the SNB probably won’t get involved. After all, the change in wording to its forex policy is a tacit admission that €1.50 is arbitrary and that perhaps the Franc could stand to gain a little bit, especially in the context of the EU fiscal issues. Not to mention that intervention is expensive and ineffective in the long-term.

If traders really get ahead of themselves, though, Hildebrand has already proven that he’s not afraid to act.

Nervous analysts continue to struggle with the data released concerning a host of powerful indicators.  The trajectory of a recovery seems muddled as one positive piece of news is soon diminished by a negative counter-report.  The much anticipated Manufacturing Index generated by the Institute of Supply Management had some good news.  The report led to a substantial reversal of overnight trading caused by gloomy manufacturing news from England.

The Institute of Supply indicated that manufacturing rose 4% in August to 52.9% from July’s 48.9%.  The growth exceeded expectations by a stunning 2.4%.  August marks the first month that manufacturing has expanded in the last 18 months as the overall economy grew for the fourth consecutive month.  The report was greeted with early morning enthusiasm on Wall Street.

However, many investors remain unconvinced.  Many traders feel the equity markets have run their limit with the 50% increase in the S&P 500 since March 2009.  England’s manufacturing slump is a matter of concern but coupled with a slowing of China’s economy the recovery appears to have a flimsy base. 

The President of the Princeton Financial Group in New Jersey, Andre Bakhos, explained; “There are concerns mounting that the market has gotten ahead of itself and as investors look to China it appears that they are running into a bout of concern regarding their own economy.”

Construction and Housing – Good News, Bad News

The National Association of Realtors released their pending home sales for July report.  The news indicates that some stability is returning to the troubled housing sector as pending home sales rose 3.2% in July.  The 97.6 tally marks the highest activity level since June 2007. 

Overall, pending home sales have risen in each of the past six months.  July pending sales were 12% higher in year-over-year comparisons.  Many of these pending sales are distressed sales or foreclosures.  However, before prices can be expected to stabilize, this inventory needs to be cleared.  Some experts believe there remains one year’s worth of troubled inventory.

As manufacturing improved, construction fell.  A report from the Commerce Department stated that U.S. construction fell t its lowest level since February 2004.  This occurred despite a rise in residential construction and a rise in federal construction.

Buoyed by first homebuyers attempting to capture the $8000 tax credit, which expires in November 2009, residential construction jumped 2.3% after falling 0.5% in June.  Encouraged by the economic stimulus package, federal construction rose 0.8%, the largest rise since September 2008.

Overall, construction fell 0.2% in July and was adjusted down 0.1% for June.  Public construction fell 0.7%, the largest fall since January and hardly an endorsement for a recovering economy.

Clunkers To The Rescue

August auto sales were the highest in the past 20 months.  The “Cash For Clunkers” program contributed to a big rise in auto sales.  The new annualized rate of sales is reported at 15.8 million vehicles.  Experts expect sales to slide dramatically for the remainder of 2009.

“We expect sales for the remainder of the year to fall well below August results, but we believe momentum from the program as well as the stabilization in the economy and improvement in consumer confidence could boost sales above the 9.5 million average seen in the first half,” said Brian Johnson of Barclays capital.

Ford sales are expected to increase 53% in August from a year ago.  GM sales fell 9% and Chrysler rose 2%.  The Cash for Clunkers program generated 690,114 new sales that would not have occurred without the incentive.  The cost of the program is estimated at $2.88 billion.

The U.S. Department of Transportation estimates 450,000 Cash For Clunker sales in August and approximately 240,000 July sales.  U.S. inventories are low which may help the unemployment numbers, but automakers are cautious about end of the year activity.