Swiss Franc and the SNB Monetary Policy

June 16, 2023 12:29

The Swiss Franc is one of the most popular currencies in the global markets. Just by mentioning the Swiss currency, some may think the word “stability” as Switzerland is a country that didn’t take part in an armed conflict for the last 200 years and its economy is one of the strongest in Europe as well as globally.

Trading the Swiss franc may not be as popular as trading the US dollar or the British pound however the US dollar to Swiss Franc is considered one of the major currency pairs that are traded every day in global currency markets. In this blog, we will share valuable insights about the Swiss franc and the Swiss economy.

Why does the Swiss National Bank (SNB) policy affect the Swiss franc?

The Swiss National Bank (SNB) is the central bank of Switzerland and plays a crucial role in the country's monetary system. The SNB has two head offices, located in Bern and Zurich. It was established in 1906 and operates under special regulations. The bank is publicly owned, with around 78% owned by Swiss public entities, while the rest is publicly traded.

As an independent institution, the SNB is mandated to conduct monetary policy in the best interest of the entire country. Its primary goal is to ensure price stability while considering economic developments. Price stability is vital for fostering growth and prosperity, as inflation and deflation can disrupt economic activity and hinder efficient resource allocation.

To implement monetary policy, the SNB sets the SNB policy rate, which influences short-term Swiss franc money market rates. The bank also intervenes in the foreign exchange market when necessary to influence monetary conditions.

In terms of regulation, the SNB has explicit responsibilities in the banking sector. It determines systemically important banks and their functions, and collaborates with other regulatory bodies to ensure capital adequacy, liquidity, and organizational requirements.

Moreover, the SNB collects statistical data to fulfil its monetary policy functions, oversight responsibilities in payment and securities settlement systems, and contribute to the stability of the Swiss financial system. The collected data are evaluated internally and published to monitor the economy and support monetary policy decisions.

SNB’s interest rate decision: How much will it affect the Swiss Franc?

The SNB’s governing board will convene on June 22nd to decide on interest rates. Swiss CPI inflation decelerated in May, coming in at 2.2% on a year-to-year basis. The SNB’s target is to bring headline inflation down to 2%.

According to a Reuters report regarding the upcoming SNB meeting, published on June 15th, “market pricing implies a 54% chance of a 50-bp increase, and a 46% chance of a 25-bp rise from the current 1.5% level.”

SNB’s governor Thomas Jordan said on June 8th that it is really important to bring Switzerland’s headline inflation to the level of price stability, adding that keeping the consumer prices’ growth under 2% for a long time would mean that the economy does not face problems anymore.

The SNB’s vice chairman, Martin Schegel, reiterated that the Swiss central bank is ready to be active in forex markets to ensure appropriate monetary conditions and stressed that it is too early to sound the “all clear” on inflation despite recent dips in the data.

Barclays: Weak US dollar may support the Swiss franc

As the Swiss franc has remained a strong performer lately, currency analysts at Barclays expect the Swiss currency to strengthen even more as they forecast more interest rate hikes by the SNB and increased FX intervention by the central bank.

The report by Barclays said: “The Swiss franc strength versus the dollar is the main avenue of preserving REER CHF valuations in a weak dollar environment; meanwhile, weaker risk conditions typically associated with dollar strength keep the CHF well-supported.”

Commerzbank: SNB’s tightening policy near its end?

Economists at Commerzbank revealed their SNB policy outlook and its potential implications for the EUR/CHF pair in a report published on June 12th. The report mentioned that “a further rate hike at the SNB’s meeting next week is likely to be a ‘fait accompli’. A further significant tightening beyond that hardly seems credible though.”  

The German bank’s market analysts noted that “a lot can happen until the SNB’s next meeting in September, of course, but in view of the fact that inflation in Switzerland has recently eased more than the SNB had expected and was close to the upper limit of 0-2% at 2.2% in May means that the need for further rate hikes seems limited. Instead, a further fall in inflation is likely to increase the SNB’s tolerance for Franc depreciation so that we see increased possibilities on the upside as regards EUR/CHF.” 

Trading the Swiss franc using risk management tools

While some investors consider the Swiss franc to be a “safe haven” in a time of economic turmoil, this does not mean that trading it against other currencies doesn’t include risk. Investors and traders shouldn’t forget that financial markets can easily move in favour but also against their plans.  

The Swiss franc is no exception to the rule. Risks increase especially if you are a beginner trader which means that you may not have the necessary trading experience to judge what would be the right course of action when trading. Risk management is essential for beginner traders. Only by using risk management tools, beginner traders will be able to enjoy the trading experience with less anxiety and a clearer mind. 

Using risk management tools is one thing, but how about learning how to use them? There is a wide range of educational materials including webinars, articles, guides, seminars etc., provided by brokers or trading training hubs. Sometimes, access to such materials is for free so beginner traders should grab the opportunity and learn the risk management fundamentals before embarking on this new but full of risk experience.  

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.