USD/CHF: the decisive role behind the dollar and the position of the SNB
Having completed the past week in positive territory, the DXY dollar index is rising again today. At the start of today's European session, DXY futures are traded near 99.19, up 37 pips from Friday's close. We also note that today is already the 7th day of continuous growth of DXY and strengthening of the dollar.
Investors also prefer it to other traditional defensive assets such as the yen, gold, franc.
The Japanese yen is weakening both against the backdrop of rising oil and natural gas prices due to the military conflict in Ukraine, while Japan is an active energy importer, and against the backdrop of the position of the Bank of Japan, which maintains an extremely loose monetary policy despite accelerating inflation in the country. Recently, the Bank of Japan also announced additional bond purchases, raising the possibility of widening yield gaps between US and Japanese bonds.
Despite the fact that gold retains the prospect of further growth in its quotes (we wrote about this in our previous post), today it is falling in price. Probably, investors distanced themselves a little from the events in Ukraine and the accelerating inflation in the world, focusing on the prospect of tightening the Fed's monetary policy. As you know, in mid-March, the Fed began a cycle of raising interest rates. In addition, as early as May, the rate of their increase may be increased. The Fed admits the possibility of raising interest rates by 50 or even 75 basis points at once. It is also expected that the US central bank may soon begin to reduce its balance sheet, which is approximately $9 trillion.
As for the franc, the position of the central bank of Switzerland is of great importance in the dynamics of its quotations. As a result of the meeting last Thursday, the Swiss National Bank left its key interest rate and deposit rate at -0.75%, announcing the preservation of a loose monetary policy. The bank's management also reiterated their readiness to intervene in the foreign exchange market. According to the leaders of the SNB, the exchange rate of the franc remains too high. The SNB regularly says that the franc "remains heavily overvalued" and the bank "will take appropriate action if necessary".
While the franc retains safe-haven status, which will continue to support demand for it, the threat of foreign exchange intervention, which the Swiss National Bank has not reported either before or after, is certainly a strong deterrent for the strengthening of the franc.
From the news regarding Switzerland and the franc this week, it is worth paying attention to the publication on Wednesday (at 07:00 and 08:00 GMT) of the KOF leading indicator index, which is considered an indicator of economic stability in Switzerland, and the ZEW index of expectations, which assesses the business climate, the situation on the employment market and other factors that affect doing business in Switzerland. Pretty high indicators are expected; their relative decline will have a negative impact on the franc. However, it will most likely have a short-term impact on the franc quotes.
One way or another, at the moment, the decisive role in the dynamics of the USD/CHF pair remains with the dollar and the position of the SNB, which retains the right to interfere in trading on the financial market if the strengthening of the franc, in its opinion, will pose a threat to the national economy.
Today, the publication of important indicators in the economic calendar is not scheduled. Trading volumes are likely to be low, which, however, does not eliminate the possibility of a sharp short-term increase in volatility caused by speculative actions of financial market participants.