Talking Points

  • Understanding Any Central Bank
  • Key Economic Mandates of the SNB
  • Future Challenges
  • 2014 Meetings

As a Forex trader it’s a good idea to get comfortable with major Central Banks and familiarize yourself with their Monetary Policy which can help you develop trade ideas. If you’re new to Forex, but are familiar with the Stock Markets, you can think of a Central Bank Meeting as the Forex equivalent of the Earnings Announcement. When a company announces their earnings, they’ll also get investors excited about upcoming opportunities that the company is looking to capitalize from.

Conversely, if you remember 2008-2013, it’s also an ideal time to let investors know that they shouldn’t plan their retirement just yet as the company is facing a few headwinds that will have to be addressed before they can hit their targets as a company. When a Central bank has a monetary policy announcement, they’ll likely discuss what opportunities lie ahead like, how the economy as a whole is looking to capitalize on. For example, such as improving the employment picture or a healthy showing of inflation, or when there are challenges ahead like inflation getting out of hand, that the Central Bank is hoping to keep it contained.

Understanding a Central Bank

To get a good grasp of any central bank, it’s helpful to know three things. First, you need to know what economic measure they find important and worth managing as a central bank, also referred to as key mandates. Second, it’s important to know when they are meeting next so that you can manage your trades accordingly. Third, it’s important to know what major undertakings the central bank is involved in which has dramatically affected their currencies value and at some point they may soon unwind which will also have extreme importance to the future value of the currency you’re looking to trade.

The following three elements will be discussed in relation to the Swiss National Bank or SNB, so that you have a clear understanding on how your CHF based trades could be affected by the SNB in your trading future.

Key Economic Mandates of the SNB

The SNB has committed to focusing on three economic mandates that will guide their monetary policy decision making going forward. The key mandates are:

1. Price Stability

Since 2009, Price Stability of the Swiss Franc or CHF has the key focus of the three mandates to be discussed. The focus was thrust upon them because the CHF has historically be recognized as a financial Safe Haven, so in 2009 when the Euro Crisis began to hemorrhage, billions of dollars, euros, and other currencies flew into Switzerland seeking safety. This caused demand for CHF bonds to fetch higher and higher payment which boosted the value of the CHF to unsustainable levels for the SNB and forced their hand. As an economy that depends on exports, an expensive home currency made CHF-based goods less attractive to foreign buyers which help explains the SNB’s aggressive action of the EURCHF peg. Even in 2014, SNB President Jordan reaffirmed the necessity of the peg for the “foreseeable future”.

Learn Forex: Price Action That Led to 1.2000 EURCHF Peg

A Beginner’s Guide to Understanding the Swiss National Bank

Created by Tyler Yell

2. Medium-Term Inflation

Inflation is a key focus of any central bank and the SNB is no different. When borrowing is low and the economy is struggling, then a central bank will often look to the lower interest rates to boost incentives to borrow, which is often the quickest way to grow the economy. The SNB has recently tracked home prices to gauge domestic inflation majors. When inflation gets out of hand, the SNB will look to raise interest rates to limit inflation from getting out of control. The current inflation target is near 2.0%, however the current readings have been at 0.10% so they’re a good way from the target.

3. Steering the Interest Rate in the CHF Money Market, using the 3-Month LIBOR

Steering the interest rate is the key method of controlling inflation to meet the SNB targets. When SNB meets, they often discuss how inflation is progressing and if their hand is pushed due to out of desired range inflation, they may adjust their reference rate. As of early 2014, the reference rate has been near 0.0%

Future Challenges for SNB

In recent interviews, SNB President Jordan, has mentioned that the Franc cap, where EURCHF is tied to 1.2000, is a necessary tool for the Swiss economy to thrive going forward. Real estate inflation is beginning to creep up which would normally cause a central bank to raise interest rates, however the periphery economies that trade heavily with Switzerland are still in recovery mode which means that in many ways, the Swiss economy is still in recovery.

Future, Monetary Policy meetings will likely continue to discuss this dynamic of rising real estate inflation alongside the need for the EURCHF floor staying in place. Lastly, a report in early 2014 came out stating the SNB lost $9.9 Billion due to their massive XAUUSD holdings which dropped 28% in 2013. Any further decline in XAUUSD for 2014 could put further pressure on the SNB’s ability to continue buying foreign currencies in order to keep the EURCHF floor at 1.2000. However, it should be noted that in 2013 the SNB stated that they haven’t had to purchase currencies in order to enforce the EURCHF CAP.

2014 Swiss National Bank - Monetary Policy Assessment Meetings

A Beginner’s Guide to Understanding the Swiss National Bank

Happy Trading!

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---Written by Tyler Yell, Trading Instructor

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