The Swiss franc weakened yesterday against the greenback after the Swiss National Bank refrained from making any changes to the prevailing negative interest rates while lowering inflation projections. From a low of 0.9870, the USDCHF pair rallied to a high of 0.9940 in the past 24 hours.
SNB issues gloomy economic outlook
Yesterday, at the end of the monetary policy meeting, the Swiss National Bank (SNB) did not announce any changes to the current ultra-loose monetary policy.
The Swiss central bank highlighted the “fragile” exchange rate scenario as a reason to keep the expansive course unchanged for the fourth consecutive year. In the past few months, investor concerns regarding Italian politics, US-China trade tensions, and Brexit has kept the franc bullish, shifting it away from the low recorded in April, against the euro. Notably, the SNB repeated its frequently used phrase that the overall situation remains “fragile.” The central bank also did not forget to maintain its currency intervention threat.
During the policy meeting, the SNB kept the borrowing costs unchanged, with the interest rate on sight deposits staying at -0.75% and the three-month Libor target range remaining at between –1.25% and –0.25%.
The central bank said: “The SNB will remain active in the foreign exchange market as necessary while taking the overall currency situation into consideration.”
Thomas Jordan, president of the Swiss Central Bank, opined that global growth was “weighing on the Swiss economy.”
Commenting on the world economy, Jordan said “The global economy is weaker than six months ago, and the same is true for Switzerland. But in the last half of 2017 and the first half of 2018, we had extraordinary growth, and now we are going back to a more normal level of growth.”
Reflecting the bank’s earlier stand, Jordan told the Swiss franc remains “highly valued” and that the negative interest rate would be maintained to discourage large purchases of the Swiss Franc.
More importantly, Jordan revealed that the SNB would opt for further trimming of interest rates or purchasing of foreign exchange in order to keep the Franc’s exchange rate weak.
Jordan said, “We are ready to intervene in the foreign exchange market in order to reduce the pressure on the Swiss franc.”
Interestingly, the SNB may not have any need to raise interest rates to ward off inflation in Switzerland as the central bank’s inflation outlook for 2018, 2019, and 2020 are below 2%.
For 2018, SNB continues to anticipate an inflation rate of 0.9%. However, the central bank slashed its forecast for 2019 from 0.8% to 0.5% and for 2020 from 1.2% to 1.0%.
In Bern, Jordan spoke about the risks to the economy: “Risks are to the downside, as is the case with the global economy. In particular, a sharp slowdown internationally would quickly spread to Switzerland.”
The President also stated that the central bank expects Swiss economic growth to slow down to about 1.5% in 2019, from an anticipated 2.5% in 2018. It can be remembered that the market had a rude shock 10 days before when it was reported that Switzerland’s economy contracted by 0.2% in the third quarter. All these factors indicate that the Swiss Franc will remain weak in the short-term.
Technically, the USDCHF pair is moving along the ascending channel. Furthermore, the RSI indicator has crossed above 50 reading. Therefore, we can expect the USDCHF pair to remain bullish in the week ahead.
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