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Swiss Franc in Spotlight As SNB Warns of More Forex Interventions

June 24, 2020 at 14:14 by Andrew Moran

10, 20, 50 and 100 Swiss franc banknotesThe Swiss franc is back in the spotlight in the middle of the trading week as the central bank’s warning that it will keep up its fight against the currency’s appreciation concerned investors. As Switzerland’s economy is on track for the worst year in more than four decades, the near-term future of the nation remains uncertain. But with uncertainty prevalent throughout global financial markets, is the franc still the go-to safe-haven asset for investors?

While the Swiss National Bank (SNB) will keep its subzero interest rates unchanged, central bank chief Thomas Jordan reiterated the institution’s plan to put a lid on the franc’s appreciation. The SNB has been continually fighting the franc’s value, and the SNB noted that it could trigger additional aggressive foreign exchange interventions to limit its appreciation.

Since the economy is forecast to contract 6% this year and consumer prices to remain relatively flat, the SNB believes it has the leeway to sell more francs. For an export-oriented market, this would be a critical measure to prop up the economy as the rest of the world faces a steep downturn in the fallout of the coronavirus pandemic.

In light of the highly valued Swiss franc it remains willing to intervene more strongly in the foreign exchange market.

That does not mean the SNB can rescue the economy that is expected to slump at its worst rate since 1975. The gross domestic product (GDP) is projected to improve, but it could be quite a while until it returns to pre-crisis levels. This means the public will likely endure a -0.75% interest rate for a few more years.

Meanwhile, the SNB has come under fire for refusing to raise its payments to the country’s federal and regional governments in the aftermath of the COVID-19 public health crisis to fill their budget holes. The SNB has enjoyed a $52.8 billion profit over the last year, and some are demanding the central bank to distribute an extra $4 billion this year. The SNB recently invested billions into US stocks since the market bottom, and its returns have been impressive.

SNB Vice-Chairman Fritz Zurbruegg said this would trigger political consequences in the future:

If we start to link SNB profit distributions to special requests or earmarking, these profits will take on a political significance that they should not have. This would set a precedent, the profits would be politicised.

This is where fiscal policy comes in. If fiscal policy is now no longer able to use its instruments, this will lead to a worse overall economic result.

On the data front, the Swiss investor sentiment index surged by 17.4 points to 48.7 in June, the best level since December 2017. This is an important reading because it suggests that markets are betting on an economic recovery over the next six months.

The USD/CHF currency pair rose 0.29% to 0.9476, from an opening of 0.9451, at 14:08 GMT on Wednesday. The EUR/CHF fell 0.11% to 1.0675, from an opening of 1.0685.

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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