The Swiss Franc fell against the dollar yesterday after the Swiss National Bank’s Vice Chairman Fritz Zurbruegg said that the ultra-loose monetary policy is the best option available right now and the bank’s enormous balance sheet will not stand in the way of further currency market interventions to avoid the Franc from strengthening further.
SNB’s balance sheet, Moody’s warning & US-China trade war
The SNB’s balance sheet has risen to over 800 billion Swiss francs (797 billion its dollars)- more than the entire Swiss economy, as a result of its foreign currency purchases to curb the Swiss franc. However, this would not prevent the SNB from intervening again in the currency markets if necessary.
In an interview published on Wednesday with the Swiss newspaper, Schaffhauser Nachrichten, Zurbruegg said: “There are risks that we have accepted to fight against the over-valuation of the franc, and we can live with that. The size of our balance sheet doesn’t limit our ability to act, and we have shown that we are still ready to intervene in the currency markets if necessary. That’s why there is no talk at present about reducing this portfolio.”
The SNB has fought a protracted battle to prevent the Swiss franc from strengthening further. Franc’s strength has a negative impact on Switzerland’s export-dependent economy. The SNB, which continues to maintain an interest rate of -0.75% for deposits in order to discourage the appetite for the Franc, also had room for maneuver in its interest rate policy.
The head of the SNB, Thomas Jordan, warned of the continuing risks of bubbles in the real estate market. Furthermore, he talked down the Franc by telling the government that he believes the Swiss currency is highly valued.
The Swiss government also issued the following official statement: “Jordan emphasized that monetary policy with negative interest rates and the willingness to intervene [on foreign exchange markets] remains necessary.”
In other news, the credit rating agency Moody’s cautioned on Thursday that global economic expansion would probably slow down in the next two years and that it anticipated that the trade war between the US and China to shoot up further.
In its report, the agency said, “We expect global growth to slow to under 3.0% in 2019 and 2020, from an estimated 3.3% in 2017-18.”
Moody’s pointed out that the recently imposed tariffs on Chinese goods worth $200 billion are likely to rise from 10% to 25% in January.
Moody’s said: “In both countries, the overall direct macro impact on growth will be manageable. However, persistent and broadening tensions between the two largest economies globally are increasingly likely to have widespread negative implications by undermining investment.”
In the US, the new Democratic majority in the House of Representatives is expected to support President Donald Trump’s trade war with China but will scrutinize the discussions more closely with allies, trade experts, and lawmakers. Trump has slapped tariffs on Chinese goods worth $250 billion to force Beijing to bring an end to the theft of intellectual property and compulsory technology transfers, advance market access for US companies, and trim down its high-tech industrial subsidy program.
The Democrats, the established trade union party, mostly assist such movements, in particular, because they expect to have an impact on American workers.
Commenting on Trump’s liberty to take decisions related to trade, Gary Hufbauer, a senior fellow and trade expert at the Peterson Institute for International Economics, said: “I think Trump has a free hand to pursue his aggressive approach. If anything, the Blue Wave (of Democrats) will be as hawkish, if not more hawkish, than Trump on China.”
Meanwhile, a prominent Chinese government advisor has stated that it is unlikely that Beijing and Washington will reach an agreement on intellectual property rights or further open up the Chinese financial market – even if the two countries’ leaders meet later this month.
While giving a speech at Harvard University, Fan Gang, a former member of the monetary policy committee of the People’s Bank of China said: “What they were negotiating in Beijing and Washington in the past round [of talks earlier this year] was mostly about trade itself.”
Fan pointed out that the countries had not even started to talk about the two issues at the center of the trade war and so it is “hard to have a solution” to the dispute. When asked whether China would better its intellectual property security and additionally open up its financial market to alleviate trade tensions with Washington, Fan opined the reforms were essential but would not happen immediately.
Finally, during yesterday’s monetary policy meeting, the Fed kept interest rates unchanged. While the decision was broadly anticipated, investors looked for clues about the central bank’s subsequent moves on the policy. The Fed has raised rates three times in 2018, and it is expected to hike once again before year-end. The Fed hinted that rate hikes would be gradual in the future.
Regular intervention by the SNB is expected to keep the Franc under pressure, while the Fed’s confirmation of further rate hikes has turned the greenback strong.
Technically, the USDCHF pair has broken the resistance at 0.9970. Furthermore, the MACD indicator is rising in the positive region. As a result, we can expect the currency pair to move within the ascending channel.
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