Swiss Franc Strength Continues as SNB Leaves Rates Unchanged
September 21, 2018 9:41 am
Yesterday, the Swiss National Bank released its interest rates decision. As expected, the bank left interest rates unchanged and signalled that the negative interest rates would remain unchanged for a considerable amount of time. In the previous four meetings, the bank had said that it believed that the franc was overvalued. In yesterday’s monetary policy assessment, the bank reiterated this statement by saying:
Since the monetary policy assessment of June 2018, the Swiss franc has appreciated noticeably, against the major currencies as well as against emerging market currencies. The Swiss franc is highly valued, and the situation on the foreign exchange market is still fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the attractiveness of Swiss franc investments low and thus ease pressure on the currency.
This was an indication that the bank is likely to continue with the low interest rates policy. This is however relatively complicated because the Swiss economy has shown excellent signs of recovery. The unemployment rate is at a record low, external demand has led to increased factory production, and the services industry is growing. There are also signs that inflation is returning.
But the SNB is limited in what it can do because it has effectively tethered itself to the euro in recent years. The Swiss franc has typically been a strong currency given Switzerland’s status as a safe haven, meaning investors flood to it in times of global stress. With the franc rising sharply at the height of Europe’s debt crisis, in 2011 the SNB imposed a floor on how weak the euro could trade against the franc.
Therefore, as the franc continues to strengthen against the major peers, traders will pay close attention to it. Ultimately, there is a likelihood that the central bank will move to hike interest rates. In the near-term, the Swiss Franc is likely to continue moving higher against the peer currencies.
Yesterday, the Swiss National Bank released its interest rates decision. As expected, the bank left interest rates unchanged and signalled that the negative interest rates would remain unchanged for a considerable amount of time. In the previous four meetings, the bank had said that it believed that the franc was overvalued. In yesterday’s monetary policy assessment, the bank reiterated this statement by saying:
Since the monetary policy assessment of June 2018, the Swiss franc has appreciated noticeably, against the major currencies as well as against emerging market currencies. The Swiss franc is highly valued, and the situation on the foreign exchange market is still fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the attractiveness of Swiss franc investments low and thus ease pressure on the currency.
This was an indication that the bank is likely to continue with the low interest rates policy. This is however relatively complicated because the Swiss economy has shown excellent signs of recovery. The unemployment rate is at a record low, external demand has led to increased factory production, and the services industry is growing. There are also signs that inflation is returning.
In an editorial, the Wall Street Journal wrote that:
But the SNB is limited in what it can do because it has effectively tethered itself to the euro in recent years. The Swiss franc has typically been a strong currency given Switzerland’s status as a safe haven, meaning investors flood to it in times of global stress. With the franc rising sharply at the height of Europe’s debt crisis, in 2011 the SNB imposed a floor on how weak the euro could trade against the franc.
Therefore, as the franc continues to strengthen against the major peers, traders will pay close attention to it. Ultimately, there is a likelihood that the central bank will move to hike interest rates. In the near-term, the Swiss Franc is likely to continue moving higher against the peer currencies.
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