Massive selloff: Swiss Franc plunges 2% in five days amid growing SNB-Fed divergence
- USD/CHF climbs to 16-month highs above 0.8250 as the Federal Reserve confirms the hawkish shift.
- The US central bank hiked rates on Wednesday and hinted at further rate hikes ahead.
- The SNB is widely expected to keep its benchmark rate at 0% well into 2027.
The Swiss Franc (CHF) consolidates losses at 16-month lows against the US Dollar (USD) after dropping more than 2% in the previous five trading days. The USD/CHF pair surged to the mid-0.8200s on Wednesday after the Federal Reserve (Fed) confirmed its hawkish shift, increasing the monetary policy divergence with the Swiss National Bank (SNB).
The Fed hiked rates by 25 basis points to the 3.75%-4% range, on Wednesday, as widely expected. The surprise, however, came at Chairman Kevin Warsh’s press conference, with an unexpectedly hawkish message, which boosted expectations of at least one more rate hike before the end of the year.
Warsh noted that “inflation remains elevated” and that the “economy appears to be strengthening,” which markets interpreted as a clear sign that further rate hikes are in the pipeline. These comments have restored confidence in the central bank’s independence, pushing long-term yields lower and boosting the yield on the two-year note, the most closely related to interest rate expectations, ultimately providing a significant boost to the US Dollar.
SNB is set to keep rates lower for longer
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 heightens monetary policy divergence with the Fed and undermines the Swiss Franc’s attractiveness for speculative traders.
Recent data from Switzerland showed that consumer inflation accelerated to a 0.8% year-over-year rate in August from 0.4% in July, which prompted the SNB president to affirm that the “wind has changed on interest rates.” Markets, however, do not seem to have bought the idea of any imminent monetary policy change.
Against this background, Strategists at Societe Generale see the CHF among the preferred funding currencies for carry traders: “Yen correction is likely to persist for a while longer unless the BoJ is particularly hawkish,” while the market is set to “remain comfortable holding short CHF, short GBP, and short NZD positions,” reflecting a preference to stay positioned against the Swiss Franc, Pound and Kiwi as long as the Fed retains a hawkish bias.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.