Central Banks keep markets choppy

The SNB held rate settings unchanged at the June policy review, as widely expected. The central bank said in a statement that the “expansionary monetary policy remains necessary to ensure appropriate monetary conditions in Switzerland“. To this extent “and in light of the highly valued Swiss franc it remains willing to intervene more strongly in the foreign exchange market”. Under the SNB Covid-19 refinancing facility (CRF) the bank is also providing the banking system with additional liquidity. Not surprisingly the bank stressed that growth and inflation forecasts come with an unusually high degree of uncertainty at the moment, but under that proviso the bank projects CPI to fall to -0.7% this year and remain negative at -0.2% in 2021 before lifting to 0.2% in 2022. This is based on the assumption that the policy rate remains at -0.75%, which highlights that negative rates are unlikely to disappear any time soon.

SNB is sticking to aggressive fx intervention as the main tool to fight the impact of the coronavirus pandemic. SNB chief Jordan stressed that the currency is “highly valued” and repeated that the central bank will continue to sell it as needed. The bank now expects a contraction in economic activity of 6% this year, the most severe recession since 1970. Inflation forecasts were also cut but while the central bank maintains a dovish bias and previously said rates can be tweaked further, it is pretty clear that officials are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remains the main message.

Low for Longer is also the message for Norges Bank.  Norges Bank left its policy rate unchanged at zero percent. Norway’s central bank said in a statement that “the committee’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead”. Lower for longer then is the main message as the pandemic leads to a “sharp downturn in the Norwegian economy”. The statement did say that since the May meeting “activity has picked up faster than expected”, “unemployment has fallen more than anticipated and oil prices have risen”, but despite this activity remains “substantially lower than at the start of the year”. There is also still “considerable uncertainty surrounding the path to recovery”. Against that background the bank argues that “low interest rates are contributing to speeding up the return to more normal output and employment levels”. Norges Bank’s latest policy rate forecast “implies a rate at the current level of the next couple of years, followed by a gradual rise as economic conditions normalise”.

Nonetheless, after today’s SNB conference, the bank is clearly trying to prevent a “disproportionately” strong Swiss franc. That said, as the Swiss franc came under strong upward pressure due to search for safe havens and as it still  remains highly valued according to SNB, the Swiss franc is expected to face a limited appreciation as SNB maintained that they will keep intervening strongly to limit the appreciation of the Swiss franc – as they have been doing over the past few months already.

As for today the conference looks to be an uneventful event as CHF has kept steady and USDCHF has stalled since the Asia session within the 0.9481-0.9500 area, while EURCHF  has been consolidating between 1.06671.0689 for 6 consecutive hours.

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Andria Pichidi

Market Analyst

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