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Swiss Franc Weakens on Trade War Concerns, Bearish Monetary Policy Forecasts

November 8, 2018 at 20:35 by Andrew Moran

Swiss franc banknotes - 20The Swiss franc is weakening against the greenback on Thursday after the central bank warned that the trade war could rock the currency. A central bank official also encouraged investors to hold tight because a tighter monetary policy is still far away from being realized. That said, officials believe the franc remains highly valued in the global financial markets.

If a full-scale trade spat commenced, the Swiss economy would be one of the hardest hit markets, bringing the pain to the franc, warned Swiss National Bank (SNB) head Thomas Jordan.

Speaking at a conference in Bern on Wednesday, Jordan averred that central banks would tighten monetary policy to ward off inflation risks amid higher prices stemming from tariffs. The other scenario is that nations would slash interest rates to spur economic growth. But he believes it is difficult to predict how the safe-haven currency would perform in such an environment.

Would our currency be sought as a safe haven in the event of a trade war?

Or would it even come under downward pressure given that Switzerland, as a small, open economy, would face particularly strong exposure to a severe contraction in world trade?

He is, however, concerned about the ballooning housing bubble in both Switzerland and the rest of the world.

Meanwhile, Andrea Maechler, SNB Governing Board Member, told a central bank event on Thursday that it remains too early for officials to pull the trigger on tightening monetary policy. Despite it being a decade since the Great Recession, inflation is low, the franc is highly valued, and the foreign exchange market is too fragile, she said.

For Maechler, just because other central banks are tightening policy in the middle of economic growth, it does not mean the SNB should adopt the same measures.

Switzerland too has seen a trend towards faster price adjustments over the last few years. Thus, shocks such as strong appreciation or depreciation of the Swiss franc could feed through to inflation more rapidly in the future.

These remarks come as several government officials have complained about the SNB’s ultra-low interest rates and expanding balance sheet. Ueli Maurer, the Swiss Finance Minister, slammed the SNB this past summer, noting “with all this intervention, we have a big, big balance sheet.”

On the data front, investors will look to the unemployment data for October.

The USD/CHF currency pair rose 0.4% to 1.0064, from an opening of 1.0021, at 18:17 GMT on Thursday. The EUR/CHF dipped 0.16% to 1.1435, from an opening of 1.1454.

If you have any questions, comments or opinions regarding the Swiss Franc, feel free to post them using the commentary form below.

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