Summer is here but the market refuses to calm down for the holiday season. The Swiss franc has been the biggest surprise of the day. Against the euro, it plunged to its lowest point, last seen when the Swiss National Bank removed the cap that it had versus the currency, in January 2015.
The USD/CHF reached an almost 2-year low as well, before it rebounds sharply higher. The abrupt slide comes from the change of outlook for global economy. While speculations want major banks like Fed and ECB to tighten their monetary policies soon, SNB hinted its plans to keep interest rates low. The Swiss bank holds its deposit rate at an all-time record low of -0.75% since January 2015 while they kept it unchanged on the latest policy meeting on June 15th, aiming to stabilize the inflation and support growth. The target range for three-month libor was also left steady between -1.25 percent and -0.25 percent while policymakers said that the Swiss franc remains overvalued and that a negative rate and forex interventions are intended to rein the currency.
Euro and Swiss franc have been traditionally very close, which is changing as the speculations that ECB will begin slowing down its monetary easing are becoming stronger. In the last ECB policy meeting on July 20th, central bank’s chief Mario Draghi, announced that they will consider QE tapering in the next policy meeting in September, as we mentioned in a previous daily market report “EUR/USD at 23-Month High as ECB Considers QE Tapering; USD/CAD Profit Locked”. The strong expectations of more hawkish movements from the ECB, benefited strongly the euro which added more than 11% against the U.S. dollar since January. SNB obviously does not want a strong franc and policymakers believe that their firmly neutral monetary policy stance is weakening the currency. The Swiss National Bank will probably keep this cautious stance and remain back from Fed’s rate hikes, thus we could see more losses, especially against the U.S. dollar.
Read the full article on JFD Research.