GBP/CHF: All Else Aside

GBP, CHF, All, Else, Aside, Fundamental Analysis, fx trader, forex

29 Jun 2016

With or without the referendum vote the Swiss National Bank was doing all it could do to weaken a stubbornly strong Franc. And as if the UK referendum vote wasn’t enough, any hopes for a US Fed rate increase, strengthening the US Dollar which might have taken some pressure off the Franc, were dashed after a string of weak US economic data. Although the Fed had downplayed the impact of the referendum, the weight of the decision reflected in several press releases: the 6 June Speech to an economic forum; the 15 June statement following the monetary policy meeting and in the semiannual testimony to the US congress. The Fed firmly drove home the point that any rate increases would be fewer and further in between regardless of the referendum’s outcome.

In the days leading up to the 23 June vote, the Swiss National Bank Governing Board convened 16 June for its scheduled monetary policy meeting and decided to maintain its policy; sight deposits at -0.75% and three month Libor target between -1.25% and -0.25%. Lastly, the SNB reiterated that it would intervene directly if it deemed necessary to defend the already ‘significantly overvalued Franc’.

The SNB increased its short term inflation expectations based on the recovery of petroleum prices1: “...new conditional inflation forecast suggests inflation will rise faster over the coming quarters than the SNB predicted in March, principally due to the significant increase in oil prices in the intervening period. The effect of this oil price rise on annual inflation vanishes after the first quarter of 2017...” It should be noted that inflation expectations are still significantly depressed: “...At –0.4%, the inflation forecast for 2016 is 0.4 percentage points higher than in March. For 2017, the SNB expects an inflation rate of 0.3%, compared to 0.1% forecast in the last quarter, while still anticipating a rate of 0.9% for 2018...” The forecast is based on a continuance of the accommodative rate policy and makes no reference to the referendum’s outcome.

The SNB Governing Council sounded far more optimistic about the US recovery, than did the US Fed: “...The moderate recovery in the global economy continues. It is particularly well advanced in the US, which is on the cusp of full employment. Economic growth in the euro area is gradually becoming more broad-based. In China, growth remains robust thanks to economic policy measures aimed at stimulating demand...”

Switzerland is an export oriented economy, and although the board sounded upbeat over important global advanced economies, it did recognize that “...international growth is principally being driven by domestic demand. By contrast, international trade and global manufacturing remain subdued...” Perhaps this is another way of saying that some advanced global economies are dependent on continued economic stimulus.

GBP, CHF, All, Else, Aside, Fundamental Analysis, fx trader, forex Price Event ChartGBP/CHF Price Event Chart