Swiss Franc

Last week saw the Swiss National Bank offer absolutely no hints about the prospects of tightening in the foreseeable future. In contrast, Mario Draghi, the European Central Bank President, was quite bullish on Eurozone inflation outlook.

The SNB was surprisingly relaxed about the currency’s recent strength, once again describing the franc as merely being "highly valued."

Political headlines and trade fears are dominating the headlines in today’s North American session, leading to a slight risk-off tone despite a positive open for risk assets. As a result, we’ve seen the US dollar, Japanese yen, and Swiss franc ascend to become the strongest major currencies on the day after bringing up the rear through the first four days of the trading week.

If you were just to look at the where the major currencies are trading relative to yesterday’s US close, you’d think it’s been a pretty quiet day; after all, none of the majors are trading more than 0.3% from the day’s open as of writing.

Both the US dollar and US equity markets attempted to bounce on Wednesday after consecutive down days, but were unable to fully buck the pressures imposed largely by fears of an impending global trade war.

It might not be on every trader’s radar, but the EUR/CHF has reached its highest level since the Swiss National Bank’s decision to scrap its 1.20 floor in January 2015.

After the UK’s Consumer Price Index inflation data for August came out higher than expected on Tuesday, speculation that the Bank of England would be taking on a more hawkish stance during Thursday’s monetary policy decision boosted the British pound dramatically against other currencies. On Wednesday, however, the UK’s average earnings index (3-month average ending in July, compared to the same period a year earlier) fell short of expectations at 2.1% against a prior consensus forecast of 2.3%. This put somewhat of a damper on the hawkish BoE thesis, prompting the pound to pare some of Tuesday’s gains. Despite the lower-than-expected wage growth, however, other aspects of the jobs data beat expectations, including another multi-decade low in the UK unemployment rate and a surprise decrease in unemployment claims for August.

The tide is turning: central banks are finally in the process of ending their extraordinary loose monetary policy stances that had been originally established in response to the global financial crisis and the economic slump that ensued. The US Federal Reserve started the process of normalising its policy, raising interest raised rates three times now.

While most central banks are or close to dropping their dovish policy stances, the Swiss National Bank is likely to buck that trend for a while yet as it seeks to devalue its currency. The SNB is almost certain to leave its main Libor Rate unchanged at -0.75% tomorrow morning and deliver the usual warning about it being ready to intervene in the FX markets if necessary.

The UK election has come and gone, and the outcome could hardly have been more dramatic. In the wake of a hung Parliament, where UK PM Theresa May’s Conservative Party failed to gain an overall parliamentary majority despite garnering more votes than any other party, May announced intentions on Friday to align with Northern Ireland's Democratic Unionist Party in forming a coalition government. While sterling plunged on the release of exit poll projections Thursday evening pointing to a likely hung Parliament, the currency stabilized on Friday as Theresa May tentatively soothed severe concerns over the future of UK politics and the looming start of Brexit negotiations with the European Union. This is not at all to say that the British pound is now free and clear of pressure and market worries. On the contrary, ongoing uncertainties within the UK government and surrounding Theresa May’s mandate to lead negotiations are likely to continue weighing on the pound as the inevitably difficult Brexit process begins.

The US dollar pulled back on Thursday after having rallied strongly for the first half of the week. Prior to this pullback, the dollar had been boosted sharply this week by rebounding US economic data and a corresponding rise in expectations for a June interest rate hike by the Federal Reserve.

USD/CHF broke down sharply below a rising trend channel and returned to parity (1.0000) on Wednesday. This occurred after the US Federal Reserve raised interest rates by a quarter point to 0.75-1.00% but issued an unexpectedly dovish outlook, which led to a steep plunge for the US dollar.

The EUR/CHF has been a forgotten currency pair, but is the worst days behind it now? The franc has been stubbornly strong against the euro. But with the ECB’s next policy move likely to be to reduce accommodation, the rate differential favours a recovery in EUR/CHF. Trouble is, there’s significant political risks facing the Eurozone in the coming months and that may keep a lid on the euro and support the perceived safe-haven Swiss franc. Nevertheless, the Swiss National Bank stands ready to intervene if the franc appreciates further.

Fed Chair Janet Yellen’s testimony before both chambers of Congress on Tuesday/Wednesday appeared to strike a slightly more hawkish tone, as Yellen stated that it would be “unwise” to delay raising interest rates further.

The tragic killing Thursday of a pro-EU politician, UK Labour Party MP Jo Cox, occurred just a week before Britain is scheduled to hold its EU referendum to vote on whether or not it will remain in the European Union. This horrific event has naturally sent shockwaves across the UK and around the world, leading to a temporary halt in the previously aggressive campaigning from both sides of the Brexit debate.

After the Federal Reserve kept US interest rates unchanged as expected on Wednesday and reiterated its consistently cautious stance with regard to future rate increases, annualized Advance GDP data for Q1 came out on Thursday morning that disappointed already-low prior estimates. In the first quarter of the year, the US economy was estimated to have grown by only an annualized 0.5% against prior expectations of 0.7% growth.

USD/CHF has tentatively turned back to the downside on Monday ahead of this week’s potentially pivotal Federal Reserve meeting, when guidance on the trajectory of interest rates in the US is expected to be provided by Wednesday’s FOMC statement.

Some of the key macro themes this past week were focused on the US dollar, global equities, and the ongoing saga surrounding crude oil. Specifically, the dollar remained well-supported, despite weaker-than-expected inflation readings during the week that should reasonably prompt the Federal Reserve to continue its cautious and increasingly dovish stance. Stock indices, most notably in the US and UK, hit year-to-date highs this week, largely due to rebounding crude oil prices and progressively more dovish central banks. Finally, as for crude oil itself, the past week has essentially been a preview for this coming weekend’s highly anticipated showing of major oil-producing nations in Qatar, co-starring Saudi Arabia and Russia.