USD/CHF eerily calm as SNB leaves interest rates unchanged

The USD/CHF pair remained calm after the Swiss National Bank (SNB) delivered its interest rate decision. The pair is trading at 0.9498, which is 0.12% above yesterday’s close.

SNB interest rate decision

Like all countries, Switzerland has been affected significantly by the coronavirus illness. The disease has infected more than 31,000 people and killed almost 2,000 people in the country.

To prevent the disease, the government announced strict social distancing measures in April. This meant closing all non-essential companies.

As a result, the economy has been on a sharp decline. On Monday, the State Secretariat for Economic Affairs (SECO) released a dim forecast for the economy. The committee expects the economy to contract by 6.2% this year and the unemployment rate to average 3.8% this year. This will be the worst economic slump since 1975.

In the meeting started yesterday, the Swiss National Bank (SNB) decided to leave interest rates unchanged at -0.75%. This was in line with what most analysts polled by Reuters were expecting. In the statement, Governor Thomas Jordan committed to intervening “more strongly” if the economic situation worsened. He also said that the bank was continuing to provide more liquidity to the banking sector.

On consumer prices, the bank expects that prices will decline by -0.7% this year and possibly rise in 2021. They expect it to rise to minus 0.2% in 2021 and to 0.2% in the following year. More so, the bank expects the GDP to contract by 6% this year. The statement said:

“Overall, GDP is likely to contract by around 6% this year. This would be the strongest decline since the oil crisis in the 1970s. The economic revival in the second half of the year is likely to be reflected in clearly positive growth in 2021.”

This contraction will mostly because of slowdown internally and externally. Switzerland is mostly an export-oriented economy, meaning that slowdown in other countries affects its growth.

USD/CHF recent trends

For starters, the USD/CHF pair is quite unique because the US dollar and Swiss franc are key safe havens. The franc is a haven because of the safety of the Swiss banking sector and the fact that Switzerland is a neutral country. Therefore, the currency pair tends to have unique moves, unlike the GBP/USD or USD/NOK.

As a major exporting country, the SNB prefers a weaker Swiss franc because it makes the exports relatively cheaper. To achieve that, the SNB has introduced the most negative rates in the developed countries. However, it has also attracted criticism by the Trump administration, which have warned it about currency manipulation.

As you can see above, the USD/CHF pair dropped sharply in March when the coronavirus illness was declared a pandemic. In this period, the US dollar index was climbing as more people moved to the safety of the USD. The pair made a V-shaped recovery after the SNB pushed rates further negative. Since April, the currency has been gaining against the USD. In the statement, the bank said:

“The SNB is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%, and in light of the highly valued Swiss franc it remains willing to intervene more strongly in the foreign exchange market.”

USD/CHF technical outlook

On the daily chart below, we see that the USD/CHF pair has been on a downward trend. It is also below the 50-day and 100-day exponential moving average. Also, after jumping on Friday, the pair has been forming a bullish pennant pattern. Still, this pennant has not been defined well.

At this point, the outlook of the pair is neutral because it has not reacted to the SNB interest rate decision. As such, a move below the low of 0.9375 will signal that bears have prevailed, which will push it lower. On the other hand, a move above Friday’s high of 0.9555 will see the price continue rising.