EUR/CHF: Trading the Swiss National Bank Interest Rate Decision

Trading the News: Swiss National Bank Interest Rate Decision

What’s Expected
Time of release:        12/10/2009 08:30 GMT, 03:30 EST
Primary Pair Impact :    EURCHF
Expected:         0.25%
Previous:         0.25%

Effects the SNB interest rate decision has had over EURCHF for the past 2 meeting

September 2009 SNB Interest Rate Decision

The Swiss National Bank kept the benchmark interest rate at 0.25% in September to stem the downside risks for growth and inflation, and said the board will continue to purchase corporate bonds if conditions warrant as the global financial system remains weak. Moreover, the policy statement said that the central bank “will continue to act decisively to prevent any appreciation of the Swiss franc against the euro” as inflation is expected to hold below the 2% target over the next two-years, and went onto say that “an immediate correction in monetary policy would be precipitated since the inflation outlook is associated with major downside risks.” At the same time, the SNB forecasts price growth reach 2.3% in 2012 as the economy to return to growth, and market participants speculate the central bank to tighten policy over the following year as conditions improve.

June 2009 SNB Interest Rate Decision

The central bank in Switzerland held borrowing costs at 0.25% in June and pledged to take “firm action” to stem the appreciation in the exchange rate, and policy makers may continue to intervene in the currency market as the outlook for growth and inflation remains bleak. SNB Governor Roth said that the economic “situation is gradually normalizing, although it remains very vulnerable,” and held a dovish outlook for price growth as they continued to see a risk for deflation. At the same time, board member Thomas Jordan said that the central bank will take steps to “prevent an appreciation of the Swiss franc against the euro,” but went onto say that the SNB has not set a “fixed threshold” for the exchange rate in an effort to ward off speculative trading as the global financial system remains fragile.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the euro against the Swiss franc. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURCHF ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the euro against the Swiss franc. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURCHF ahead of the data release.

How To Trade This Event Risk

The Swiss National Bank is widely anticipated to hold the benchmark interest rate at 0.25% in December as policy makers aim to stem the downside risks for growth and inflation, and the EUR/CHF could face increased volatility following the rate decision as the central bank is likely to maintain its pledge to temper the marked appreciation in the exchange rate. A Bloomberg News survey shows all of the 16 economists polled forecast the SNB to keep the rate at its currently level, while investors are pricing a zero percent change for a rate hike accord to Credit Suisse overnight index swaps as the Governor Jean-Pierre Roth maintains a dovish outlook for inflation. Nevertheless, a report by the State Secretariat for Economic Affairs showed the nation emerged from the recession in the third quarter as the growth rate expanded 0.3% from the previous three-month period, led by a rise in business spending, and conditions are likely to improve going into the following year as policy makers take unprecedented steps to shore up the real economy. Moreover, labor conditions unexpectedly picked up during the same period as employment increased 0.2% after contracting 0.4% during the three-months through June, while consumer prices increased 0.2% in November to top forecasts for a flat reading, and the central bank may ramp up its outlook for growth and inflation as the expansion in policy continues to support economic activity within the region. However, SNB Governor Roth held a cautious outlook for the region and expects “the exit of recession will be much longer” compared to previous cycles, and pledged to “avoid a fortified appreciation” in the exchange rate as policy makers anticipate economic activity to contract at an annual pace of 2.0% this year and see a risk for inflation to held below the target over the next two-years. At the same time, the central bank head noted that “the framework of measures put in place during the crisis will have to be corrected soon” as economic conditions improve, and went onto say that developments in price growth will help to “determinate the appropriate time to abandon unconventional measures” as the SNB maintains its primary mandate to ensure price stability within the region. Meanwhile, the Organization for Economic Cooperation and Development expects the central bank to maintain a loose policy throughout 2010 as the group anticipates the economy to return to growth at “low rates,” and expects the board to utilize “foreign exchange intervention as needed to prevent the Swiss franc from appreciating” as the government plans to normalize public finances going forward.

As market participants anticipate the SNB to maintain its current policy in December, trading the rate decision may not be as transparent as some of our previous trades but nevertheless, as the nation emerges from the recession this year, policy makers may hold an improved outlook for growth and inflation as the expansion in policy continues to support the real economy. Therefore, if the central bank raises its economic forecast and sees scope to normalize policy over the following year, we will look for a red, five-minute candle following the policy statement to establish a sell-entry on two-lots of EUR/CHF. Once these conditions are met, we will set our initial stop at the nearby swing high or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, fears of a protracted recovery paired with the slump in price growth could lead the SNB to maintain its unconventional measures to shore up the real economy, and price action following the rate decision could  set the stage for a long EUR/CHF trade as the central bank forecasts inflation to hold below target over the next two-years. As a result, if the board hold a cautious outlook for the economy and remains willing to intervene in the currency market to stem the appreciation in the exchange rate, we will favor a bearish outlook for the Swissie, and will follow the same setup for a long euro-franc trade as the short position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com