The Swiss National Bank is widely expected to hold the benchmark interest rate at 0.25% this month as policy makers anticipate growth and inflation to remain subdued going into the following year, and the central bank may continue to intervene in the currency market as the board pledges to stem the appreciation in the exchange rate.
[B][U]Trading the News: Swiss National Bank Interest Rate Decision[/U][/B]
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What’s Expected[/U][/B]
Time of release: [B]09/17/2009 12:00 GMT, 08:00 EST[/B]
Primary Pair Impact[B] : EURCHF[/B]
Expected: 0.25%
Previous: 0.25%
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Effects the change in SNB interest rate decision has had over EURCHF for the past 2 meeting[/U][/B]
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[U]June 2009 SNB Interest Rate Decision[/U]
The central bank in Switzerland held borrowing costs at 0.25% in June and pledged to take “firm action” to stem the appreciation in the exchange rate, and policy makers may continue to intervene in the currency market as the outlook for growth and inflation remains bleak. SNB Governor Roth said that the economic “situation is gradually normalizing, although it remains very vulnerable,” and held a dovish outlook for price growth as they continued to see a risk for deflation. At the same time, board member Thomas Jordan said that the central bank will take steps to “prevent an appreciation of the Swiss franc against the euro,” but went onto say that the SNB has not set a “fixed threshold” for the exchange rate in an effort to ward off speculative trading as the global financial system remains fragile.
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March 2009 SNB Interest Rate Decision[/U]
The Swiss National Bank lowered the benchmark interest rate by 25bp in March to 0.25% from 0.50%, and aims to purchase corporate bonds along with foreign currencies in an effort to stem the appreciation in the exchange rate as the region faces its worst economic downturn in over a quarter century. The expansion in monetary policy marks the first currency intervention since 1992, and the central bank may take additional steps to soften the landing of the economy as policy makers anticipate the growth rate to contract 2.5-3.0% this year and see a risk for deflation. The central bank forecasts price growth to fall at an annual rate of 0.5% this year and project inflation to be “very close to zero” over the next two-years, with President Jean-Pierre Roth stating that “the effects of our interest rate cuts was neutralized by the permanent appreciation of the Swiss franc.”
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What To Look For Before The Release[/B][B][/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the euro against the Swiss franc. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURCHF ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the euro against the Swiss franc. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURCHF ahead of the data release.
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How To Trade This Event Risk[/B]
The Swiss National Bank is widely expected to hold the benchmark interest rate at 0.25% this month as policy makers anticipate growth and inflation to remain subdued going into the following year, and the central bank may continue to intervene in the currency market as the board pledges to stem the appreciation in the exchange rate. A Bloomberg News survey shows all of the 21 economists polled forecast the SNB to hold borrowing costs steady as the outlook for global growth remains weak, and the governing council is likely to maintain a dovish policy stance going forward as they anticipate price growth to hold “very close to zero” over the next two-years. At the same time, the 2Q GDP report encouraged an improved outlook for the region as the annual rate of growth contracted at a slower pace than expected, and the extraordinary efforts taken on by the government should help to stem the downside risks for growth and inflation as board member Thomas Jordan projects economic activity to expand by mid-2010. Moreover, the trade surplus widened in July following a 4.1% rise in exports, while the KoF leading indicator improved for the fourth consecutive month in August however, the downturn in the labor market may hamper the prospects for a sustainable recovery as businesses scale back on production and employment in order to weather the slump in global trade. A report by the Federal Statistics Office showed payrolls slipped 0.4% in the second-quarter, which drove the jobless rate to a six-year high of 4.0% in August, while the annual rate of production fell at an even faster pace from the first three-months of the year, and the data reinforces a weakened outlook for future growth as the region faces its worst economic downturn in over a quarter century. As a result, the SNB is expected to maintain its commitment to purchase corporate bonds and increase its holdings of foreign currencies, and speculation for an intervention should push the exchange rate higher as the central bank looks beyond the interest rate to manage monetary policy.
Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, price action following the rate decision could set the stage for a long euro-franc trade as market participants speculate the SNB to increase its foreign currency holdings. Therefore, if the central bank maintains its current policy and holds a dovish outlook for inflation, we will look for a green, five-minute candle following the announcement to generate a buy entry on two-lots of EUR/CHF. Once these conditions are met, we will set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
In contrast, as policy makers anticipate the economy to return to growth in the second half of the following year, the SNB may hold an enhanced outlook for growth and inflation as trade conditions improve, which could lead the central bank to hold a neutral policy stance. As a result, if the governing council concludes its purchases of corporate bonds and foreign currencies, we will favor a bearish outlook for the euro-franc, and will follow the same strategy for a short EUR/CHF trade as the long position mentioned above, just in reverse.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]