USD/CHF: Trading The Swiss National Bank Interest Rate Decision

Trading the News: SNB Rate Decision

What's Expected

Time of release: 12/11/2008 08:30 GMT, 03:30 EST
Primary Pair Impact : USDCHF
Expected: 0.50%
Previous: 1.00%

Impact of the SNB Rate Decision on USDCHF over the last Three Meetings

September 2008 SNB Rate Decision

Policymakers in Switzerland held the 3-month LIBOR rate unchanged at 2.75% as they anticipate inflation to fall within the 2% target in 2009. The SNB noted that the slowdown in the domestic economy will help to alleviate price pressures going forward, which suggests that the central bank will continue to hold a neutral outlook over the near-term. Amid the dovish rhetoric by the SNB, deteriorating trade conditions paired with the spillover effects of the global credit crunch has certainly dragged on growth, and conditions may only get worse as the major economies throughout the world teeter on the brink of a recession. Fading demands from home and abroad continues to weigh on the growth outlook for Switzerland, which could stoke bets for a SNB rate cut over the following months.

June 2008 SNB Rate Decision

Switzerland's central bank continued to hold a neutral policy stance as they kept the key interest rate steady at 2.75% for the third straight meeting, and noted that the policymakers are not planning to raise borrowing costs in the near future even as price pressures intensify. The Swiss National Bank stated that the spike in inflation was 'transitory,' and does not require the central bank to shift its policy outlook. The dovish rhetoric expressed by the SNB Governor Jean-Pierre Roth suggests that the interest rate will remain on hold as policymakers attempt to balance the risks for growth and inflation, and could be force to shift their policy stance over the second half of the year as growth prospects deteriorate.

March 2008 SNB Rate Decision

The Swiss National Bank held the 3-month target LIBOR rate steady at a six-year high of 2.75% for the second consecutive meeting as they continue to carry out their dual mandate to ensure price stability while fostering economic activity. Increased turmoil in the global credit market lead the central bank to lower their growth forecast for 2008 to 1.5%-2.0% from an initial estimate of 'about 2%,' while they raised their outlook for inflation to 2.0% from 1.7%. The revised outlook held by policymakers suggests that the SNB will remain on hold for the foreseeable future as growth prospects falter, but could be force to shift their outlook over the coming months as financial uncertainties linger

How To Trade This Event Risk

The SNB interest rate decision could weigh on the Swiss franc as the central bank is widely expected to lower the 3-month target LIBOR rate by another 50bp to 0.50% amid the extraordinary efforts taken on by Governor Jean-Pierre Roth. Deteriorating fundamentals paired with increased turmoil in the global financial market pushed policymakers to take unprecedented steps to support economic growth as they unexpectedly cut borrowing costs by 175bp over the past two months, which lowered the key interest rate to 1.00% from 2.75%. Growth prospects for Switzerland have weakened considerably throughout the second half of the year as the economy failed to grow in the third quarter, and conditions are likely to get worse as Swiss National Bank forecasts economic activity to contract in 2009. In addition, the Swiss leading indicator fell to a five-year low of -0.05 from a revised reading of 0.28 in October as the Economiesuisse industry group expects growth prospects to deteriorate further over the coming months. Moreover, manufacturing activity slipped to a record low in November as the PMI reading plunged to 35.2 from 47.0, and firms may continue to scale back on production as demands from home and abroad falter. Meanwhile, a Bloomberg News survey showed that 11 of the 16 economists polled expect the Swiss National Bank to deliver a 50bp rate cut at tomorrow's meeting, which could stoke increased selling pressures for the Swiss franc over the near-term.

Despite expectations for a rate cut by the SNB, we would need a clear shift in the policy outlook paired with neutral commentary following the decision to set the stage for a long Swiss franc trade. With our expectations at hand, we will look for a red, five-minute candle following the release to confirm a short trade on two lots of USDCHF. Once these conditions are met, we will place our initial stop above the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Nevertheless, easing price pressures paired with the dour outlook for growth supports the argument for a rate reduction by the SNB, and policymakers may continue to lower borrowing costs next year as the central bank expect economic activity to weaken further. As a result, a 50bp cut or more paired with dovish commentary would certainly favor a bearish outlook for the swissie, and we will follow the same strategy for a long USDCHF trade as the short listed above, just in reverse.

DailyFX

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