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Summary

• The Swiss National Bank (SNB) delivered a 75 bps rate hike at its September monetary policy meeting, bringing its policy rate to +0.50%.
• Overall, the announcement's forward guidance was not as hawkish compared to many other global central banks' comments. Rather than signaling forceful rate hikes ahead, the SNB instead repeated that it cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term. In addition, the central bank indicated it remains willing to intervene in the foreign exchange market as necessary.
• Looking ahead, we believe the SNB will continue tightening monetary policy but will deliver rate hikes of smaller magnitude, consistent with our outlook for slower growth and somewhat more contained inflation next year. More specifically, we expect the SNB to hike rates by 50 bps in December and 25 bps in March, with a terminal policy rate of 1.25%.

Swiss National Bank Exits Negative Rates

The Swiss National Bank (SNB) delivered a 75 bps rate hike at its September monetary policy meeting, bringing its policy rate to +0.50%. Switzerland was the last of the European countries to move its policy rate into positive territory.

Overall, the announcement's forward guidance was not as hawkish compared to many other global central banks' comments. Rather than signaling forceful rate hikes ahead like other institutions, the SNB instead repeated that it cannot rule out further increases in the SNB policy rate to ensure price stability over the medium term. In addition, the central bank continues to closely monitor the franc exchange rate given currency strength has been a factor in helping dampen inflation pressures. After reaching a seven-year high this week against the euro, the franc fell around 2% versus the euro after the announcement, as the 75 bps rate move fell short of the increase priced into interest rate markets. The SNB reiterated it remains willing to intervene in the foreign exchange market as necessary.

Along with its monetary policy decision, the SNB also released updated economic projections. It upwardly revised its overall CPI forecast, and now expects inflation to average 3% in 2022, 2.4% in 2023, and 1.7% in 2024, conditional on its current policy rate of 0.50%. As for growth, the SNB cut its forecast to 2% GDP growth this year, half a percentage point lower than its June forecast, citing slower overall global growth and the energy shortage in Europe.

Where to From Here?

Looking ahead, we believe the SNB will continue tightening monetary policy but will deliver rate hikes of smaller magnitude, consistent with our outlook for slower growth and somewhat more contained inflation next year. More specifically, we expect the SNB to hike rates by an additional 50 bps in December, bringing its policy rate to 1.00% by the end of 2022. Then in 2023, we expect a 25 bps rate hike in March, with a terminal policy rate of 1.25%. Moreover, we do not expect any unscheduled inter-meeting rate hikes, as President Jordan indicated the SNB would only resort to unplanned tightening if the economic outlook changed significantly.

On the growth front, we see downside risks accumulating. While GDP growth in the second quarter was steady, warning signs are flashing for slower growth in the coming quarters as sentiment deteriorates and the Eurozone falls into recession. GDP grew 0.3% quarter-over-quarter in Q2, boosted by the services sector reopening and household consumption, which were resilient even amid higher prices (real private consumption was up 1.4% quarter-over-quarter). However, there was some noticeable softness in the manufacturing sector, which was also reflected in the manufacturing PMI falling for the fifth straight month in August.

Moreover, the KOF leading index, which historically has been a good indicator of GDP growth, declined for the fourth straight month in August, falling to 86.5. This downward trend suggests slower or negative growth ahead. Furthermore, our expectation for a Eurozone recession by the end of 2022 poses additional downside risks for Switzerland's growth prospects, as the two regions have significant trade relations—36% of Swiss exports go to the Eurozone, while 45% of Swiss imports come from the Eurozone. The economic outlook is further complicated by the Russia-Ukraine war and resulting energy crisis, as Switzerland ultimately sources almost half of its natural gas from Russia. While Switzerland has relatively low demand for gas at only around 15% of total energy consumption, the country currently does not have large capacity to store natural gas or its own gas reserve, adding to uncertainty surrounding the growth outlook. Against this backdrop, we do not forecast an outright recession in Switzerland, but we expect economic growth to slow in 2023, which is consistent with a slower pace of rate hikes from the SNB.

Also consistent with our expectation for a slower pace of rate hikes is our outlook for more contained inflation in 2023. Inflation in Switzerland is at a 30-year high and is above the SNB's 2% target, but remains much lower compared to other major European economies. In August, the CPI quickened to 3.5% year-over-year. Taking a closer look at the details, prices for housing, water, electricity, gas and other fuels were only up 4.7% from the previous year, significantly lower than in the Eurozone, where they are up 19.7%. With the updated SNB forecasts showing annual average inflation of 2.4% for 2023 and 1.7% for 2024, we believe the central bank will continue tightening monetary policy, although larger rate hikes are likely not needed given inflation is expected to be closer to target by the end of 2023. The central bank noted that without September's 75 bps rate hike, its inflation forecast would be significantly higher.

While our base case is for smaller magnitude rate hikes in the coming quarters, we would not fully rule out a 75 bps rate hike in December. Since the SNB only has one monetary policy meeting per quarter, half as many as the ECB, the central bank could opt to deliver a larger rate hike to account for this. The central bank has also repeatedly emphasized its commitment to support the franc in order to soften the blow from higher import prices and inflationary pressures. While its willingness to intervene in foreign exchange markets is an important policy lever, large rate hikes that support the currency could also complement these actions.

WTI oil futures traded higher on Thursday, after hitting support near 82.35. The black liquid continues to hold above the key barrier of 81.00, but the bigger picture still points to a downtrend. WTI continues to trade below the downside line drawn from the high of June 14, as well as below the prior longer-term upside line taken from the low of April 19, 2020.

That said, the daily oscillators suggest that some further recovery may be on the cards before the next leg south, perhaps towards the crossroads of the aforementioned diagonal lines and the round figure of 90.00, marked by the high of July 5. The RSI, although below 50, has turned up again, while the MACD, despite negative, has rebounded as well and crossed above its trigger line.

If indeed the bears recharge from near the 90.00 zone, a tumble below 81.00 may follow, which will confirm a lower low and perhaps extend the downtrend towards the 73.00 territory, marked by the inside swing highs of December 9 and 13. If no buyers are found around there either, the bears may dive towards the 66.00 or 62.20 zones, marked by the lows of December 20 and 2 respectively.

The short-term outlook could start turning bullish upon a break above 97.50. If so, the price will be above both the trendlines, as well as above all three of the moving averages. The next resistance may be at 101.25, the break of which could carry advances towards the peak of July 5 at 108.15.

In brief, oil has been in a recovery mode today, but the broader trend remains to the downside. That said, a break below 81.00 may be needed to confirm a lower low and its continuation.

The New Zealand dollar is in negative territory for a fourth straight day. NZD/USD fell as low as 0.5803 in the Asian session, its lowest level since March 2020.

Putin threats, Fed hikes weighs on kiwi

The New Zealand dollar is in serious trouble. NZD/USD has slipped 2.2% this week, and September has been dreadful, with the kiwi declining by 4.3%. The New Zealand dollar is staggering from the double blow of an aggressive Federal Reserve and risk sentiment sliding due to ominous developments in Russia.

Ukraine’s counter-offensive has sent Russian forces in retreat, and a furious Vladimir Putin has upped the ante. He has given the go-ahead for a lightning-fast referendum in occupied Ukraine, in order to annex these territories. As well, Putin has said that all options are on the table to defend “Russian territory” and has hinted at the use of nuclear weapons. Second, Putin has ordered a partial mobilization which could involve up to 300,000 Russian soldiers. These moves are a clear escalation in the conflict and predictably, risk appetite has decreased, sending the risk-sensitive New Zealand dollar lower.

With the Federal Reserve and a host of other central banks tightening policy this week, the spectre of a global recession looms ever closer. This has unnerved investors, who are flocking to the safety of the US dollar and other safe haven assets. The Fed raised rates by 0.75% on Wednesday in a move that was widely expected. Still, the Fed’s hike can be considered hawish, as it sent a clear message that it will be uncompromising in the fight against inflation, even if that results in the US economy tipping into a recession. The markets are expecting another 0.75% rate hike in October, and with relations between Moscow and the West worsening, the outlook for risk currencies such as the New Zealand dollar look grim.

NZD/USD Technical

• NZD/USD tested support at 0.5810 earlier. Below, there is support at 0.5679
• There is resistance at 0.5900 and 0.5992

Markets

No big hawkish surprises post-Fed as the Bank of Japan, Swiss National bank, the Norges Bank and the Bank of England announced their answers to arrest above-target inflation (for Norges Bank and SNB see infra). After a split vote, the BoE raised its policy rate by ‘only’ 50 bps to 2.25%. (5 votes for 50 bps, 3 votes for 75 bps, 1 vote for 25 bps). The BoE also gave the go-ahead to reduce the stock of government bond holdings by £80 bln over the next 12 months, both via maturing gits and gits sales. The MPC acknowledged that uncertainty on retail energy prices has fallen due to the Government Energy Price Guarantee. Inflation is now expected to peak at 11% in October, but will stay above 10% over the following few months before decreasing. At the same time, the government’s growth plan will support demand and will, all else equal, add to medium term inflationary pressures. The BoE will make a full assessment on the impact in November. Even as part of the market hoped for a 75 bps hike, the UK gilt yields are gaining 16/19 bps compared to yesterday’s close. Admittedly, part of this move was driven by the broader market trend. Markets apparently assume that the BOE will catch up with a 75 bps step in November when it has a more detailed view on fiscal support. After some nervous swings immediately after the policy announcement, EUR/GBP currently trades slightly higher near 0.8750. Cable this morning touched a new multi-year low at 1.1212, but rebounded on a broader USD correction. (currently 1.126).

The established uptrend in yields continues post-Fed. Both the US 2-y (4.125%) and the 2-y EMU swap yield (2.87% intraday top) hit new cycle peak levels. The move initially showed some hesitation maybe as the likes of the SNB, BOE and Norges Bank didn’t bring an hawkish surprise, but the uptrend resumed during US dealings. Currently US yields are rising between 11 bps (10-y) and 6.0 bps (2-y). Persistent low weekly US jobless claims reinforced the Fed case for further tightening. German yields are rising +10 bps (5-y) and 0.5 bps (30-y). On FX markets, several USD cross rates at the start this morning jumped to new cycle peak levels (intraday top for DXY at 111,81; for EUR/USD 0.9809, cable 1.1212; USD/JPY 145.9) supported by the Fed’s hawkish stance and a poor risk sentiment. However; a new sustained USD upleg was blocked (at least temporary) as the Japanese Ministry of Finance step into the market to prevent a further weaking of the yen. Intervention sales in the first place hit USD/JPY (currently 141.75), but also dented the momentum in other USD cross rates. EUR/USD currently trades near 0.985. DXY is changing hands near 111.1. We doubt that BOJ interventions will be a game changer, not for the yen nor for the USD trend overall.

News Headlines

The Norwegian central bank raised its policy rate as expected by 50 bps, from 1.75% to 2.25%. Governor Wolden Bache stressed the importance of frontloading to entrench inflation expectations around the 2% inflation target and in order not to tighten more further down the cycle. Based on the Committee’s current assessment of the outlook and the balance of risks, the policy rate will most likely be raised further in November. Projections in the updated Monetary policy report suggest a policy rate around 3% in the course of winter. Risks to the outlook are balanced, stretching from upward inflation risks to downside growth risks, stemming from the squeeze on finances. The Norwegian krone trades a tad weaker at 10.25, but remains within technical ranges.

The Swiss National Bank raised its policy rate as forecast by 75 bps, from -0.25% to 0.75%. The SNB doesn’t rule out further increases to ensure price stability over the medium term. Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being. The new forecast puts average annual inflation at 3% for 2022, 2.4% for 2023 and 1.7% for 2024. The stronger Swiss franc helps to tighten monetary conditions and dampen inflationary pressures, but the SNB keeps its potential FX intervention threat alive to provide appropriate monetary conditions. Markets clearly hoped for either a bigger hike or a removal of the intervention talk, pushing EUR/CHF from 0.9466 towards 0.97.

• BoJ kept its yield curve control (YCC) policy and dovish forward guidance unchanged at the policy meeting ending this morning.
• Afterwards the Ministry of Finance instructed the BoJ to intervene to support JPY. USD/JPY traded five figures lower to 140.8 levels and then bounced up and down during the following hours.
• Japan has the world's second largest FX reserve. Thus, it has the ammunition to continue to defend JPY, but in the current economic environment, markets are likely to intensify its pressure on the YCC.

The Bank of Japan (BoJ) intervened in the FX market this morning on behalf of the Ministry of Finance (MoF). This came a few hours after the announcement that BoJ kept its QQE with yield curve control in place and thus remains the only major central bank sticking with negative rates, after SNB hiked today. In the meantime, USD/JPY continued to drift higher amid the confirmation that BoJ will continue to supply JPY to the market to defend its yield curve control. Despite highlighting that BoJ might perform stealth intervention, and not tell the market, earlier in the morning, Japan's top currency diplomat, Masato Kanda, called a second press conference at 10.15 CET on which he confirmed the decision to step in to the market.

The intervention comes after a 2022 with significant headwinds for the yen. An increasing divergence between the BoJ and other major global central banks has resulted in a widening interest rate gap between Japan and the rest of the world. At the same time, the pressure on global commodities has made significant dents in Japan's current account surplus, which in July turned into a deficit for the first time in eight years and until today the yen was at its weakest level against the dollar since the last time BoJ intervened to support the yen in 1998.

The decision to stem the massive weakening of the yen triggered a USD/JPY decline by five figures to 140.8 levels and then bounced up and down during the following hours. Japan has the world's second largest foreign exchange reserve, so there is some weight behind an intervention like this. But the fact remains that the BoJ pursues a monetary policy that sends more yen into the market. It is hardly a sustainable situation for the BoJ to pursue its inflation target while simultaneously propping up the yen. Today's decision has increased the likelihood that the BoJ will end up giving in to the global pressure for higher yields and abandon the YCC, or allow for a steeper yield curve. It is not least this higher probability that is being priced in the market and which has driven the yen stronger. If the BoJ does not adjust its monetary policy, then it may be difficult to prevent the yen from weakening again, and then we could quickly be back in a situation with a record weak yen again.

For more about the inconsistency between the BoJ's policy stance and JPY support, see FX Research - Bank of Japan's Gordian knot, 20 September.

Daily Pivots: (S1) 0.9774; (P) 0.9876; (R1) 0.9940; More...

Intraday bias in EUR/USD remains on the downside at this point. Current down trend should target 100% projection of 1.0368 to 0.9863 from 1.0197 at 0.9692. Firm break there could prompt downside acceleration and target 161.8% projection at 0.9380. On the upside, above 0.9943 minor resistance will turn intraday bias neutral first. But outlook will stay bearish as long as 1.0197 resistance holds, in case of recovery.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Daily Pivots: (S1) 1.1209; (P) 1.1297; (R1) 1.1357; More...

A temporary low is formed at 1.1210 in GBP/USD and intraday bias is turned neutral first. Some consolidations could be seen. But upside of recovery should be limited below 1.1737 resistance. On the downside, break of 1.1210 will resume larger down trend to 61.8% projection of 1.3748 to 1.1759 from 1.2292 at 1.1063 next.

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) is probably resuming long term down trend from 2.1161 (2007 high). Sustained break of 1.1409 will target 61.8% projection of 1.7190 (2014 high) to 1.1409 (2020 low) from 1.4248 (2021 high) at 1.0675. This will remain the favored case for now as long as 1.2292 resistance holds.

Daily Pivots: (S1) 143.39; (P) 144.05; (R1) 144.74; More...

USD/JPY falls sharply today after hitting 145.89 and intraday bias is turned neutral first. Further rally will remain in favor as long as 139.37 resistance turned support holds. Break of 145.89 will resume larger rally to 147.68 long term resistance. However, decisive break of 139.37 will confirm short term topping, on bearish divergence condition in 4 hour MACD. Deeper decline would be seen back towards 130.38 support.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high). For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Daily Pivots: (S1) 0.9623; (P) 0.9662; (R1) 0.9702; More

Intraday bias in USD/CHF stays on the upside for 0.9868 resistance first. Firm break there will argue that larger up trend is ready to resume through 1.0063. Overall, the corrective pattern from 1.0063 high could still extend. Below 0.9619 minor support will turn bias back to the downside for 0.9478 and below.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Extreme volatility was seen in the markets in the past 24 hours. Yen rebounds broadly today after Japan confirmed that "decisive" currency intervention was made. That came after BoJ stood pat and pledged to keep rate at low level. Swiss Franc was sold off sharply after SNB hiked 75bps, but hinted at the possibility of a pause. Sterling is mildly firmer after BoE delivered 50bps rate hike, with split votes among policymakers. For now, Yen is the strongest one for the week, followed by Dollar, and then Aussie. Kiwi is still the worst, followed by Swiss Franc and Euro.

Technically, it's still a bit early to conclude that Yen is reversing course. A focus is on USD/JPY's reaction to 139.37 resistance turned support. As long as this level holds, there is chance of another take on 1998 high at 147.68. However, sustained break of 139.37 will argue that a medium term top was already formed and deeper correction could be seen back towards 130.38 support as traders unwind positions.

In Europe, at the time of writing, FTSE is down -0.28%. DAX is down -0.71%. CAC is down -0.77%. Germany 10-year yield is down -0.0137 at 1.878. Earlier in Asia, Nikkei dropped -0.58%. Hong Kong HSI dropped -1.61%. China Shanghai SSE dropped -0.27%. Singapore Strait Times rose 0.04%. Japan 10-year JGB yield dropped -0.0163 to 0.245.

US initial jobless claims rose to 213k, below expectation

US initial jobless claims rose 5k to 213k in the week ending September 17, below expectation of 220k. Four-week moving average of initial claims dropped -6k to 217k.

Continuing claims dropped -22k to 1379k in the week ending September 10. Four-week moving average of continuing claims dropped -8k to 1405k.

BoE hikes 50bps, 3 members want 75bps, one want 25bps

BoE raises Bank rate by 50bps to 2.25% as widely expected. The voting was not unanimous, with five MPC members Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro, voted for the decisions. Three members, Jonathan Haskel, Catherine L Mann and Dave Ramsden voted for 75bps hike. One member, Swati Dhingra, voted or 25bps hike.

The Committee voted unanimous to reduce the stock of purchased government bonds by GBP 80B over the next 12 months, to a total of GBP 758B, as set out in August meeting minutes.

BoE also said that the MPC will consider and make decision on the Bank Rate "at each meeting". The scale, pace and timing of any further changes will reflect the assessment of economic outlook and inflationary pressures. It maintain the pledge to "respond forcefully" if outlook suggests "more persistent inflation pressures".

SNB hikes 75bps, signalling possibility of a pause

SNB raises policy rate by 75bps to 0.50% as widely expected, to counter "renewed rise in inflation pressure". It "cannot be ruled out" that further rate hikes will be "necessary". The reference to the time of "in the foreseeable future" was dropped.

SNB expects that inflation is "likely to remain at an elevated level for the time being". Based on the assumption that policy stays at 0.50% over the entire forecast horizon, inflation will peak at 3.4% in Q3, and stay slowing from Q2 2023 to 1.6% in Q2 2024. Inflation will average 3.0% in 2022, 2.4% in 2023, and then 1.7% in 2024.

Regarding the economy, SNB expects GDP growth of around 2% this year, roughly 0.5% lower than the last monetary policy assessment. Uncertainty remains high and the biggest risks are a "a global economic downturn, a worsening of the gas shortage in Europe and a power shortage in Switzerland".

Yen rebounds as Japan confirmed decisive intervention action taken

Yen reversed earlier decline and rebounded strongly, after a top currency diplomat confirmed that the government have intervened in the foreign exchange market for the first time since 1998. Masato Kanda, vice finance minister for international affairs, told reporters, "we have taken decisive action" on in the markets.

Finance Minister Shunichi Suzuki declined to disclose how much authorities had spent buying yen and whether other countries had consented to the move. But Kanda said Japan has "good communication" with the US.

BoJ stands part, interest rate to remain at present or lower levels

BoJ kept monetary policy unchanged as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.10%. BoJ will continue to purchase Japanese government bonds, without setting an upper limit, to keep 10-year JGB yield at around 0%. Also, BoJ will offer to purchase 10-year JGBs at 0.25% every business day through fixed -rate purchase operations, to cap the upside. These decisions were made by unanimous vote.

BoJ also pledge to continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control to achieve 2% price target, "as long as it is necessary for maintaining that target in a stable manner". The bank will not hesitate to take additional easing measures if necessary". It expects short- and long-term policy interest rates to "remain at their present or lower levels".

Governor Haruhiko Kuroda confirmed that "There's absolutely no change to our stance of maintaining easy monetary policy for the time being. We won't be raising interest rates for some time."

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9623; (P) 0.9662; (R1) 0.9702; More

Intraday bias in USD/CHF stays on the upside for 0.9868 resistance first. Firm break there will argue that larger up trend is ready to resume through 1.0063. Overall, the corrective pattern from 1.0063 high could still extend. Below 0.9619 minor support will turn bias back to the downside for 0.9478 and below.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Economic Indicators Update