We analyze the forecasting ability of financial variables to predict the state of the Swiss business cycle up to eight quarters ahead. Overall, our results suggest that financial variables convey leading information for the prediction of business cycles, even when applied to a small open economy. However, we clearly find that model specifications need to be extended to include variables accounting for external shocks, such as exchange rates or international commodity prices. It also appears that the forecasting contribution of individual variables changes over time. Specifically, in the last two decades, stock market liquidity has replaced the term spread as the best single predictor.

We study the reaction of the CHF and JPY to macroeconomic surprises and changes in the broader market environment before and during the crisis using high-frequency data. Results show that the CHF and JPY are traditionally more sensitive to macroeconomic surprises than other currencies, reflecting the fact that macroeconomic surprises impact uncertainty and risk aversion. This link was further magnified during the crisis and could not be broken by the specific measures adopted by monetary authorities to limit the appreciation trend. We also find some evidence that, during the crisis, CHF and JPY responded more strongly to surprises generating an appreciation than to surprises leading to a depreciation. Additionally, both currencies also systematically respond to changes in the general market environment. This result is robust to the use of two measures of the market environment: VIX and on a novel index based on Bloomberg wires.

a The authors are very grateful to Bruno Parnisari and Peter Steiner (SECO) for supplying previously unavailable data on Swiss sectoral value added, as well as to Gian Maria Milesi Feretti (IMF) for placing his international data set on net foreign assets at our disposal and Richard McKenzie (OECD) for valuable data suggestions. We also wish to thank Thomas Moser, Ulrich Kohli, Michel Peytrignet, Luca Ricci as well as participants to SNB internal seminars for helpful discussions. Finally we thank two anonymous referees: the paper has taken substantial advantage of their comments. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the view of their affiliated organisations.