SNB Rate Decision May Spark Selling of CHF

The SNB policy board will meet Thursday. Many analysts expect the SNB to lower interest rates 25 bps and set a new interest rate target range of 0.0-0.5% to combat deteriorating economic outlook in Switzerland. The SNB lowered interest rates 50 bps to 0.50% in December. The Swiss economy slipped into recession for the first time in six years with Q4 GDP contracting 0.3%. Swiss leading economic index fell to a five year low, PMI fell to a record low and unemployment is rising. The Swiss economy has been hurt by deteriorating growth in Europe and the global credit crisis. The Swiss economy is export driven. Exports fell 8.1% in the last quarter.

The global credit crisis has a huge impact on major Swiss banks including UBS and Credit Suisse. Wednesday, UBS reported a larger than expected 2008 loss and issued a profit warning. CHF is also vulnerable to uncertainty about the viability of Swiss bank secrecy laws. Swiss banks are under pressure to change their bank secrecy laws. In early February, the EU commission issued a report which criticized Swiss bank secrecy. Wednesday, the OECD said it may add Switzerland to its list of countries that are non cooperative tax centers. US officials have been pressuring Swiss banks to allow US access to bank accounts that are being investigated for possible tax fraud. The combination of deteriorating Swiss economic outlook, worsening bank troubles and uncertainty about bank secrecy laws have eroded some of the safe haven attraction of the CHF.

The SNB must address the issue of whether the Swiss economy will slip into deeper recession. In response to concern that the Swiss economy is worsening, the SNB may cut interest rates 25 bps. A 25 bps SNB rate cut would not be a surprise to the market. Swiss bank officials have indicated that they may consider unconventional methods including quantitative ease. Quantitative ease may include the selling of CHF (intervention) and buying of government and corporate bonds. Swiss February inflation rose 0.2%. The February inflation rise suggests that the SNB will not yet have to confront the risk of deflation in Switzerland. Therefore, any SNB move to quantitative ease will likely be gradual. If the SNB elected to adopt quantitative ease, the CHF may be vulnerable to increased selling pressure.

The technical outlook for the CHF is mixed. USD/CHF has been trading in a broad range between 1.1515 -1.1825 .The combination of SNB rate cut and move to quantitative ease could spark a retest of the 1.1800 level. A break below 1.1435, the March 10th low could set the stage for a move to the 2009 low of 1.1315 made on January 20th.

By Michael J. Malpede

Easy Forex
http://www.easy-forex.com

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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