The Swiss National Bank (SNB) raised the policy rate by another 50bp at today’s meeting. With this hike, the rate has reached 1%, a stunning development for the Swiss economy and the Swiss franc, considering that the SNB kept the rate in negative territory for years.
After the Federal Reserve of the United States decided to hike the funds rate to fight inflation, other major central banks did the same. But inflation did not rise at the same pace everywhere.
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Switzerland is an example of how a strong currency helps curb inflationary pressures. And the SNB acted swiftly in making sure the franc remains strong enough to avoid what the eurozone area experiences with a soft euro.
More tightening will be needed in 2023
At today’s press conference, the SNB revised inflation projections higher. It means more tightening will be needed in 2023, which should support the Swiss franc.
Speaking of the strong franc, in today’s introductory remarks by Thomas Jordan, the SNB Governor, one detail suggests that the SNB keeps intervening in the market. When discussing the monetary policy outlook, Jordan mentioned that since the beginning of the year, the Swiss franc has appreciated by around 4% on a trade-weighted basis.
It helped ensure that less inflation is imported from abroad.
But he also mentioned that the SNB had sold foreign currency. To do that, the central bank must buy the local currency, the Swiss franc.
Hence, the strong Swiss franc compared to other currencies in 2022 directly results from the SNB interventions.
USD/JPY and USD/CHF divergence reflects the SNB intervention
What the SNB did in 2022 explains the huge divergence between two similar currency pairs – the USD/JPY and the USD/CHF. The former rose by over 18% while the latter by only 1.64%.
USD/CHF capped at parity
Parity seems to be a key level for the USD/CHF and the SNB. Since May this year, the USD/CHF tried to hold above the level three times, only to fail every time as the SNB was a net CHF buyer.
So what comes next?
The SNB is known for its interventions. Therefore, it may change its policy and start buying foreign currency if there were to be excessive appreciation pressure on the Swiss franc.
But the trick here is that the SNB delivers its monetary policy outlook only quarterly and not every six months as other central banks do (e.g., Federal Reserve, European Central Bank). Therefore, by the time the market participants will found out what the SNB did, the market had moved already.
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