Will USD/CHF Rebound On A Rate Hike By The Swiss National Bank?

SEP 13
SNB 3-Month Libor Target Rate (08:00 EST; 12:00 GMT)

Expected: 2.25% - 3.25%

Previous: 2.00% - 3.00%

How Will The Markets React?
There are many conflicting views regarding the Swiss National Bank’s rate decision, but nevertheless, Bloomberg’s consensus estimate calls for a 25 basis point increase to the target range for the three-month Libor rate up to 2.25 - 3.25 percent. While Swiss headline inflation has remained remarkably tepid at an annualized rate of 0.8 percent, the import and producer price index recently hit 11 month highs, and these undercurrents have not escaped the vigilant eye of policy officials. In the statement following the announcement of June?s hike, SNB President Roth intensified his hawkish language, leading the investment community to price in further hikes down the line. Furthermore, recent volatility in the financial markets is unlikely to dissuade Roth from normalizing rates, as he said on August 20th, “We hope that volatility stays higher. What we had was not normal, namely, practically no volatility?Markets cannot be a one-way street, or you will get excess.” We also turn to the Swedish central bank, Riksbank, which recently raised interest rates as they faced similar economic conditions, namely: resilient GDP, tight labor markets, relatively tepid inflation (not as low as in Switzerland), and they rely heavily on the Euro-zone as a trade partner. As a result, we expect that the SNB will continue on with their rate normalization scheme, but the key to trading the event will be in the bank?s monetary policy assessment, as more constrained outlooks that infer the possibility that they will stop raising rates could send bond yields and the Swiss franc plummeting.
Bonds - 3-Month Euro Swiss Bonds
Euro Swiss 3-month contracts have started to regain a bid after the recent declines, as Wednesday?s price action brought an end to the steep drop from the August highs, which may be corrective in the bigger picture. The Swiss National Bank?s next moentary policy assessment could determine the next move for the contracts, however, as more tepid outlooks would signal that rate normalization has come to an end for the rest of 2007, leaving substantial room for gains.

As the US dollar has weakened, USDCHF has moved down with it, allowing the Swiss franc to strengthen. On a fundamental basis, gains for the Swissie has been well warranted as resilient economic growth has kept the Swiss National Bank on a consistent rate normalization schedule. This should be exhibited on Thursday when the SNB is widely anticipated to raise the target range for the three-month Libor rate up to 2.25 - 3.25 percent. However, traders should look for any changes to the bank?s outlook, as signs that the SNB will pause in their rate normalization cycle could lead the Swiss franc to lose strength against the US dollar. Furthermore, with USDCHF working towards the apex of a falling wedge, the probabilities of a reversal higher slowly increase. On the other hand, if the SNB implies that additional rate hikes loom on the horizon and broad weakness in the greenback persists, USDCHF could make a solid break down to test the 4/21/05 low of 1.1739.

Equities - Swiss Market Index
As US equities slowly gained steam early in the week, Swiss equities have followed suit. The bounce from Monday?s lows in the Swiss Market Index has helped form trendline support, leaving the index within an ascending channel. If gains continue for the Swiss markets, price could target resistance at September 4th high near 8,975. While risk-seeking trends throughout global equity markets will likely play the biggest role in where the Swiss Market Index heads next, the Swiss National Bank?s next rate decision could have an impact as well. If the central bank goes on to hike rates and continues to cite optimistic growth outlooks, the Swiss Market Index will likely ease back towards the 8,600 level. On the other hand, more even-keeled forecasts for the Swiss economy that signal that the SNB will no longer implement additional monetary policy tightening could lead the equity index to break through 8,800 to take aim on 8,975.

Written by Terri Belkas, Currency Analyst of DailyFX.com