The Swiss franc continues to rally and is trading in North America at 0.9139, down 0.37%. USD/CHF has fallen some 200 points in just one week.
SNB goes for oversize hike
The Swiss National Bank raised rates by 50 basis points today, bringing the cash rate to 1.50%. It was a toss-up whether the SNB would raise rates by 25 or 50 bp, and in the end, policy makers opted for the larger increase. There were strong reasons to support either move. Swiss inflation jumped to 3.4% in February, its highest level since 1993. Although these levels are very low compared to other major economies, inflation is above the target of 0%-2% and this supported a 50-bp increase. At the same time, the market turmoil triggered by the bank crisis provided the SNB with an out, if it so wished, to opt for a smaller 25-bp hike.
SNB head Jordan said after the rate decision that the UBS takeover of Credit Suisse had averted a financial disaster, not just for Switzerland but for the global economy. Jordan warned that it was critical that the merger take place in a smooth manner in order to maintain financial stability. The SNB has been busy lately, providing $53 billion for the takeover and signing on to a coordinated move by six central banks to boost liquidity.
The Federal Reserve raised rates by 25 bp on Wednesday as expected, but the move was a “dovish hike”. The Fed changed the language in the rate statement, stating that tighter policy “may be appropriate”, compared to “will be appropriate” in the previous statement. The dot plot chart indicated a forecast of a terminal rate of 5.1% for the end of 2023, unchanged from December.
The Fed’s battle against inflation, which is showing results, hit a snag due to the recent bank crisis which sent the markets into turmoil. The Fed made reference to the crisis in the rate statement, stating that, “The US banking system is sound and resilient”, but added that it was uncertain how the fallout of the crisis would impact the economy and inflation. ECB President Lagarde said this week that the banking debacle could help curb eurozone inflation, and the same argument, I suppose, can be said about inflation in the US.
The recent turmoil in the markets means that the Fed’s rate path is unclear. With inflation still high, there is a need for additional tightening, but at the same time, tighter policy could worsen the stress on the banking system. The markets are expecting the current tightening cycle to end soon, with a pause and rate cuts to follow later in the year.
- USD/CHF is putting pressure on support at 0.9110. The next support level is 0.8935
- 0.9226 and 0.9304 are the next resistance lines
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