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Swiss Franc Mixed As SNB Boosts Liquidity Measures, Fitch Maintains ‘AAA’ Rating

July 13, 2020 at 14:25 by Andrew Moran

Mixed Swiss franc notesThe Swiss franc is trading mixed to kick off the trading week as Switzerland’s economy attempts to be resuscitated in the aftermath of the COVID-19 pandemic. The Swiss franc is struggling for consistent direction against a myriad of currency rivals, with the central bank launching additional liquidity measures and Fitch maintaining its AAA rating of the Swiss economy.

The Swiss National Bank (SNB) recently announced that it is stepping up its liquidity efforts, including the central bank’s operations and cutting the interest rate on overnight funding for financial institutions to 0%. The SNB will maintain the basic open market operations, but it will reduce its special rate for liquidity shortage financing.

According to a statement from the SNB, the purpose of these efforts is to ensure that its overnight funding rates mirror its benchmark rate of -0.75%.

As before, the special rate will be calculated as the SNB policy rate plus a surcharge of 50 basis point. However, the lower limit for the special rate is to be reduced to at least 0%, down from the current level of at least 0.5%.

This comes soon after the SNB recently reviewed the interest rates for its current inventory of facilities, such as the COVID-19 refinancing facility, or CRF. Since introducing the CRF, the SNB has extended $16.36 billion in emergency bridging credits to more than 130,000 companies affected by the coronavirus public health crisis.

Fitch Ratings affirmed Switzerland’s Long-Term Foreign Currency (LFTC) Issuer Default Rating at “AAA” with a stable economic outlook. Fitch cited the nation’s strengthening governance and human development indicators that are additionally supported by minimal debt, high current account balances, immense net external credit position, and the franc’s global reserve currency status.

It does anticipate the economy will contract 7% this year, but Fitch projects Switzerland’s gross domestic product (GDP) will rebound more than 3% next year.

Although the lockdown measures have been lifted faster in Switzerland than in other countries, the pandemic has hit business and consumer sentiment hard, and we expect a large contraction in 2Q led by private consumption and investment. High frequency indicators suggest economic activity picked up as the containment measures are being lifted and we expect growth to start recovering in 3Q. A pick-up in economic activity and the authorities’ focused measures on employment protection should limit the increase in unemployment rate, which we forecast at 3.7% in 2020 and 4.3% in 2021, up from 2.3% in 2019. As of May 2020, around two million employees (around 30% of the labour force) were registered for the government’s short-time work scheme.

On the political front, former European Commission president Jean-Claude Juncker recently said in a newspaper interview that it is now up to Switzerland to establish a framework deal with the European Union. Juncker noted that he does not believe either side is at war with each other.

I always think to myself: with goodwill on both sides, an agreement should be possible. And that is where the European Union is waiting for further Swiss steps.

The USD/CHF currency pair dipped 0.01% to 0.9410, from an opening of 0.9411, at 14:20 GMT on Monday. The EUR/CHF advanced 0.51% to 1.0690, from an opening of 1.0636.

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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