Is it safe to buy the Swiss franc after SNB hiked 50bp?

The trading week is not over yet, but financial market participants might as well say that this is, so far, the most interesting trading week in years. Major central banks appear to have coordinated their moves in a race to tighten financial conditions globally.

It is hard to believe that what happened this week is a coincidence. In fact, in hindsight, traders and investors were warned during the last IMF meetings. Since then, it all looked like implicit coordination.

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The Fed, the ECB, and the RBA came up with surprise moves this week. And today, it was the Swiss National Bank (SNB)’s turn to do so.

It hiked the interest rate by 50bp – from negative 75bp to negative 25bp. Now, one may say that this is peanuts compared to other central banks.

But in the world of central banks, the message often matters more. The SNB (and other central banks) is telling the market that the time of easy money has passed. Instead, global higher rates are the new norm.  

SNB raises the policy rate to counter inflationary pressures

Just like other central banks, the SNB tightened the policy to fight inflation. However, the SNB is in a comfortable place.

If we compare the inflation rate in Switzerland with that of the Eurozone or the United States, we see a big disconnect. Therefore, we may say that the SNB is proactive here, trying to get ahead of the curve, knowing that monetary policy decisions act with a lag.

Inflation is “only” 2.9% in Switzerland – far below the Eurozone and the United States. But the SNB signaled today that it stands ready to hike some more. Furthermore, it stands ready to intervene in the foreign exchange market as necessary.

A weaker currency is undesirable in a rising inflation environment. This is a bit ironic because the SNB has had a hard time weakening the Swiss franc in the past and has always argued that it is overvalued.

But now, the strong franc is exactly the reason why inflation is lower in Switzerland.

Interestingly, the sharp move higher in the Swiss franc that followed the  SNB’s announcement triggered a similar move in the Japanese yen. As the Bank of Japan is due tomorrow, traders bet that it will do something similar, given the feeling of central banks’ coordination this week.

The Swiss franc gains two big figures against the US dollar

Needless to say, the Swiss franc gained across the FX dashboard. Even the USD/CHF dropped like a rock – two big figures (i.e., two hundred pips) on the news.

But one should be careful chasing this move here for at least a couple of reasons. First, the USD/CHF’s rejection comes from the parity level.

Parity is always a psychological level for market participants. Also, the fact that this is the second time the market is rejected from parity may suggest that an ascending triangle might be in the cards. Only a drop below 0.96 would put bears back in control.

Second, the exchange rate moves as a result of the central banks’ decisions. Indeed, the SNB raised by 50bp today, but the policy rate is still in negative territory at -0.25%. On the other hand, the Fed’s funds rate is at 1.75%. Hence, in the medium/long run, the interest rate differential favors the US dollar and not the Swiss franc.