SNB policy action may be required to counter Swiss franc strength
The Swiss franc currency continued to strengthen against the U.S Dollar, British pound and the euro on Monday, leaving the Swiss National Bank with a growing policy dilemma. The problems for the SNB could in fact get much worse, as the European Central Bank and the Federal Reserve Bank are expected to weaken their currencies further, with interest rate cuts and upcoming policy guidance over the next eight days.
The euro currency reached its weakest level against the Swiss franc this year on Monday as it moved below the 1.1000 benchmark, while the U.S Dollar flirted with the 0.9800 support level as the USD/CHF pair continued to benefit from the recent broad-based flight into the safety of the Swiss franc.
A weaker exchange is imperative for the Swiss economy due to the heavy reliance of Switzerland’s exporters on a weak or relatively stable exchange range. Switzerland’s flagship luxury goods making sector will start to suffer further if the national currency continues on its recent trend of rapid appreciation.
The SNB is faced with a real dilemma as direct currency intervention would be widely condemned internationally if the central bank decided to step-in and weaken the Swiss franc. President Donald Trump may also be scathing of such a direct measure and could potentially impose heavy trade tariffs on goods from Switzerland entering the United States, in retaliation to any currency manipulation.
Swiss National Bank President Thomas Jordan has reiterated that the SNB stands ready to act if the currency continues to appreciate, which certainly implies the possibility of currency intervention from the SNB. The Swiss interest rate is already below negative and placing clear strains on the domestic banking sector, leaving currency intervention or the reintroduction of a currency peg the only real options going forward.
USD/CHF Candle Chart | Source: ActivTrader
The U.S Dollar has staged an early morning rebound from the 0.9800 level against the Swiss franc, leaving the 0.9860 and 0.9888 levels as the strongest areas of upcoming resistance for the USD/CHF pair. Looking at the downside, a break below the 0.9800 support levels exposes further selling towards the 0.9710 and possibly the 0.9640 region.
Written by Nathan Batchelor, External Analyst, ActivTrades
*The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication. All information has been prepared by ActivTrades PLC (“AT”). The information does not contain a record of AT’s prices or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of futures performance. AT provides an execution-only service. Consequently, any person acting on the information provided.