The Swiss Franc was little changed against the Dollar and Pound on Thursday following the March monetary policy decision of the Swiss National Bank (SNB), which has left the outlook for USD/CHF hinged on the recovery prospects of the all-important EUR/USD and EUR/CHF exchange rates.
Swiss Franc on the Edge
Switzerland’s Franc was sold against commodity and growth currencies like the Australian Dollar and Pound on Thursday while edging higher against low-yielding counterparts like the Japanese Yen, Swedish Krona. Euro, whose inflation growth outlooks are less assured.
The net effect on Thursday was a mixed bag of Swiss exchange rates that reflected as much a pecking order of the disinflationary plight among central bank policymakers as it did the market’s contentedness with the outcome of the latest Swiss National Bank monetary policy decision.
“As expected, the SNB has revised its inflation forecasts for 2021 and 2022 due to higher oil prices and the weakening of the Swiss franc. However, the revision is minimal,” says Charlotte de Montpellier, an economist for Switzerland and France at ING. “The expected rise in inflation is still low.”
The SNB said in its latest assessment that economic activity is likely to return to its pre-crisis level in the second half of 2021. Still, that output would remain below its potential at both domestic and global levels for some time to come reflecting challenges that long predate the coronavirus crisis. In the interim, “the pandemic is continuing to have a strong adverse effect on the economy.”
The prospect of a 2021 return to pre-pandemic levels of activity is hinged on the assumption that coronavirus containment measures are eased further in the months ahead and are not renewed thereafter, which speaks of the downside risks to inflation rates that lurk along the path ahead and make a self-defeating exercise of any meaningful upward moves in Swiss exchange rates.
Swiss exchange rates have fallen substantially in the last year as the prospects of the global economy improved. However, it was largely because these declines that the outlook for Swiss inflation has also improved tentatively in recent months. Without them, the SNB’s policy stance could have been somewhat different this Thursday.
“This morning’s decision by the Swiss National Bank to keep its policy settings unchanged came as no surprise. The prospect of further falls in the franc should allow the Bank to stay out of the FX market largely, but the policy rate will remain rooted at a record low,” says David Oxley at Capital Economics. “Indeed, while the Norges Bank’s attention has shifted to rate hikes, SNB Chairman Thomas Jordan couldn’t have been any clearer in saying that there is “no signaling at all for a change to monetary policy.”
SNB policymakers left Switzerland’s main interest rate unchanged a -0.75% on Thursday, the lowest globally. They said they willing to intervene in the currency market to weaken Swiss exchange rates “as necessary.” This was a slight and subtle change of guidance from the previous warning that the bank would intervene “more strongly” if necessary, which indicates a degree of satisfaction with recent developments and one that could see less intervention from the SNB in the coming months.