Swiss Franc consolidates losses weighed by adverse monetary policy divergence
- USD/CHF holds gains just below 0.8250, on track for a 1% weekly rally
- Monetary divergence between the SNB and the rest of the major central banks has been crushing the Swiss franc.
- BoJ's hawkish hike on Friday increases the attractiveness of the CHF as funding currency for carry traders.
The Swiss Franc (CHF) holds losses against the US Dollar (USD) on Friday, after dropping nearly 1% this week and about 2% over the last two weeks. The USD/CHF pair wavers between 0.8230 and 0.8250, with upside attempts capped amid the adverse monetary policy divergence between the Swiss National Bank (SNB) and most of the world's major central banks.
The Federal Reserve (Fed) hiked rates by 25 basis points to the 3.75%-4% range, as widely expected on Wednesday. Beyond that, Chairman Kevin Warsh delivered an unexpectedly hawkish message boosting expectations of a further rate hike, most likely in December, and sending the US Dollar higher across the board.
Carry trade poses a growing threat for the Swiss Franc
Earlier on Friday, the Bank of Japan (BoJ) followed suit, raising its benchmark interest rate to the highest level in 31 years, and Governor Ueda hinted at further interest rate hikes in coming months.
The Swiss National Bank, on the contrary, is widely expected to maintain its benchmark interest rate at the current 0% level for the foreseeable future, which increases the attractiveness of the Swiss Franc as the favourite funding currency for carry trade. This practice, consisting of borrowing a low-yielding currency to buy a higher-yielding one is very popular and threatens to lead the CHF into a steady downside trend.
The UOB Group maintains a constructive medium-term stance on USD/CHF. The analysts note that “while momentum remains strong, it is too early to tell whether it is sufficient for USD to break above 0.8300.” UOB, however, notes that “only a breach of 0.8185 (…) would indicate that 0.8300 is not coming into view.”
SNB FAQs
The Swiss National Bank (SNB) is the country’s central bank. As an independent central bank, its mandate is to ensure price stability in the medium and long term. To ensure price stability, the SNB aims to maintain appropriate monetary conditions, which are determined by the interest rate level and exchange rates. For the SNB, price stability means a rise in the Swiss Consumer Price Index (CPI) of less than 2% per year.
The Swiss National Bank (SNB) Governing Board decides the appropriate level of its policy rate according to its price stability objective. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame excessive price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
Yes. The Swiss National Bank (SNB) has regularly intervened in the foreign exchange market in order to avoid the Swiss Franc (CHF) appreciating too much against other currencies. A strong CHF hurts the competitiveness of the country’s powerful export sector. Between 2011 and 2015, the SNB implemented a peg to the Euro to limit the CHF advance against it. The bank intervenes in the market using its hefty foreign exchange reserves, usually by buying foreign currencies such as the US Dollar or the Euro. During episodes of high inflation, particularly due to energy, the SNB refrains from intervening markets as a strong CHF makes energy imports cheaper, cushioning the price shock for Swiss households and businesses.
The SNB meets once a quarter – in March, June, September and December – to conduct its monetary policy assessment. Each of these assessments results in a monetary policy decision and the publication of a medium-term inflation forecast.
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