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

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

2010-03-10 20:09:00
David Song;Michael Wright,
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Trading the News: Swiss National Bank Interest Rate Decision

What’s Expected
Time of release:        03/11/2010 13:00 GMT, 08:00 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

03.10_TTN1

December 2009 SNB Interest Rate Decision

The Swiss National Bank kept the benchmark interest rate at 0.25% in December and stated that it will stop purchases of corporate bonds as its takes the first steps to withdraw its emergency measures, and said it will continue to “act decisively to prevent any excessive appreciation” in the Swiss franc. Nevertheless, SNB Vice Chairman Philipp Hildebrand publicized that the “biggest challenge” in 2010 will be “normalization”  of monetary policy, while board member Thomas Jordan noted that the emergency program was “a success” and saw scope to suspend its bond purchases as financial conditions improve. At the same time, the central bank pledged that it will counter “any excessive” moves by the franc against the euro as they aim to balance the risks for growth and inflation, and went onto add that they expect the economy to grow between 0.5% and 1% in 2010 after contracting about 1.5% this year. 03.10_TTN2

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 will reach 2.3% in 2012 as the economy returns to growth, and market participants speculate the central bank to normalize policy next year as economic conditions improve. 03.10_TTN3

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.
00001_EUR 00002_EUR

How To Trade This Event Risk

The Swiss National Bank is widely expected to hold the benchmark interest rate at 0.25% in March as the central bank aim to balance the risks for the economy, and comments following the rate decision is likely to spark increased volatility in the exchange rate as investors weigh the outlook for future policy. A Bloomberg News survey shows all of the 19 economists polled forecast the SNB to hold borrowing costs steady this month, while investors as pricing a zero percent chance for a rate hike according to Credit Suisse overnight index swaps as policy makers aim to encourage a sustainable recovery. The 4Q GDP report showed economic activity increased 0.7% during the last three-months of 2009, which exceeded expectations for a 0.4% expansion, while a separate report showed retail spending increased 4.4% for the second consecutive month in January. At the same time, the trade surplus widened to CHF 2.42B from CHF 1.36B in December, led by a 3.2% rise in exports, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.

As a result, SNB Chairman Philip Hildebrand pledged to normalize policy this year and start raising the interest rate as the recovery gathers momentum, while the Organization for Economic Cooperation and Development said that the central bank should maintain an loose policy stance as the outlook for growth and inflation remains subdued. Meanwhile, board member Thomas Jordan argued that the marked appreciation in the Swiss franc will not hamper the economic recovery as policy makers forecast GDP to expand approximately 1 percent this year, and noted that the scope of the emergency programs will “depend on the situation” of the economy as it emerges from the recession. Moreover, Mr. Jordan said that it remains too early to tighten policy during an interview last month, and reiterated the central bank’s pledge to prevent an “excessive” appreciation in the exchange rate as policy makers aim to mitigate the risks for deflation.

As the SNB is anticipated to maintain its current policy this month, trading the given event risk will certainly not be as clear cut as some of our previous trade. Nevertheless, comments following the rate decision are likely to move the currency market and we may see the Swiss franc appreciate against its major counterparts if the central bank holds an improved outlook for the region. Therefore, if policy makers see scope to unwind its emergency measures further and raises its forecast for growth and inflation, we would need to see a red, five-minute candle following the rate decision to generate a sell entry on two-lots of EUR/CHF. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance taking volatility into account, and this risk will establish our first mark. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in an effort to lock-in our profits.

On the other hand, the ongoing turmoil in Europe paired with subdued price growth may lead the SNB to maintain a cautious outlook for the economy, and dovish language following the policy meeting is likely to weigh on the exchange rate as the central bank maintains the option to intervene in the currency market. As a result, if the central bank maintains its pledge to prevent an “excessive” appreciation, 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 mentioned above, just in reverse.

03.10_TTN4

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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