Forex Review: SNB Monetary Policy Statement

Why the heck did the Swiss franc rally during the SNB monetary policy statement?! Was that just a knee-jerk reaction or the start of a longer-term trend?

SNB head Thomas Jordan and his gang of central bank officials decided to keep policy unchanged for the time being instead of following in the footsteps of the ECB. Recall that Jordan previously hinted that the Swiss central bank might ramp up their efforts to keep their currency weak if the ECB decides to ease. After all, an ECB rate cut could push EUR/CHF closer to the 1.2000 floor later on, which might then require easing or central bank intervention from the SNB.

So much for waiting for another massive Swissy selloff! As I mentioned in my preview of the five major central bank events this week, the SNB event tends to be a very quiet one unless intervention takes place. It turns out that disappointment can move the markets as well!

Traders who sold the Swiss franc in anticipation of SNB easing decided to close out their short positions when the central bank was all bark and no bite. The SNB simply reiterated their pledge to defend the franc peg and maintained the three-month LIBOR range at 0-0.25%. Policymakers also kept their growth forecasts unchanged and reiterated that inflationary pressures would remain weak in the near term. What’s surprising though was that they upgraded their inflation outlook for the rest of the year.

As you can see from the chart above, EUR/CHF broke to the downside as several franc bears walked away. For a currency pair that’s usually stuck in 10-pip ranges more often than not, this sharp selloff is a pretty significant move. Apart from the lack of intervention, the revised 2014 inflation forecast from the initial 0.0% estimate to 0.1% led many to believe that the SNB might not ease anytime soon. Other franc pairs also slid lower after the SNB announcement, but it appears that the ongoing trends might stay intact.

Take note that longer-term inflation forecasts for the next couple of years were downgraded, as the SNB foresees price levels rising by 0.3% in 2015 and by 0.9% in 2016. These are 0.1% lower compared to the previous estimates of 0.4% and 1.0% respectively. This reveals that, while the SNB decided to sit on its hands for now, the prospect of monetary policy easing or central bank intervention are still not completely off the table.

With the SNB likely to maintain its dovish stance for quite some time, the franc might carry on with its longer-term selloff against other major currencies. As one of our forum members observed, diverging monetary policy biases could lead to less uncertainty in the forex market now that it’s becoming clearer which central banks are hawks and which ones are doves. Do you agree?