And now the SNB!

The forex market has had a few busy days in the last week. As such, the EUR/CHF exchange rate stood at 1.0500 on Wednesday before falling below 1.0250 on Thursday. Risk aversion rose with the drop in equity markets and concerns over global growth for next year. But it has been especially the franc, which had fallen since the beginning of the month following the prospect of a rate hike by the European Central Bank, that saw a violent turning of the tide after Thomas Jordan’s and Andrea Maechler’s statements. In the wake of the ECB’s comments, the SNB is expected to raise its key rate faster than expected. With the Bank of Japan, the Swiss National Bank was previously the only one of the main banks not to consider such a change of course. Thomas Jordan said that inflation is being closely watched. Although, at 2.5%, it is significantly lower than that of our main neighbours, it remains above the 2% target. According to Andrea Maechler, who is a member of the SNB’s senior management, the Bank will not hesitate to tighten monetary policy if inflation does not fall below 2% in the medium term and if inflationary pressures change differently than expected. This is a particularly hawkish tone that prompted analysts to opt for a first increase of 0.25% at the quarterly meeting on 22 September and the possible exit from negative rates at the end of 2022 or the beginning of 2023. This would mark the end of seven years of negative rates for our country. The prospects are encouraged by Christine Lagarde’s statements at the beginning of the week. The President of the ECB said that the first interest rate hike should be enacted in July and the era of negative interest rates should come to a close by the end of the third quarter for the eurozone.

Following Ms Largarde’s statements, the US dollar fell against major currencies after setting new annual highs last week. As the rate hikes in the United States are already anticipated, the market has now turned towards the decisions of the European Central Bank and the SNB with the hope that the interest rate differential between the two sides of the Atlantic will narrow. I was a strong return of the euro and the franc, which caused the dollar to fall from 1.0350 to 1.0700 against the single currency and from parity to 0.9625 francs against the CHF. The minutes of the last FOMC meeting on 4 May will be published this evening at 8 p.m. Markets will be looking for new clues as to the extent of future monetary policy tightening, the evolution of which will depend heavily on the dollar. The Committee’s considerations should be compared with the latest disappointing economic data published in the US. Among other disappointments, the Philadelphia region’s manufacturing index fell in May to its lowest level since May 2020.

In the United Kingdom, inflation, which weighs on British purchasing power, will severely curb demand, said on Monday, Andrew Bailey, Governor of the Bank of England. In its early May forecast, the BOE expected the UK economy to contract in the fourth quarter due to higher energy prices. The survey of UK companies published yesterday is a step in this direction. The latter fell sharply in May to 51.8 points compared to 58.2 in April and 62.9 a year ago. At this level, the index is just above the 50-point mark, which marks the separation between a growing or contracting economy.

The Russian currency continued to rise, reaching its highest level in more than five years against the dollar at 55.30 roubles for one dollar and against the single currency at 56.85 roubles for one euro. About half of the foreign companies that source gas from Gazprom opened an account in roubles with Gazprombank in order to be able to convert their currency and pay for purchases. These massive conversions into roubles of euros and dollars obviously support the Russian currency despite the current situation. The Central Bank of Russia will hold an extraordinary monetary policy meeting tomorrow. The next meeting was scheduled for 10 June. In view of the strength of the rouble, we can expect the CBR to cut its benchmark rate again. It had already done so on 29 April at the last meeting, bringing it from 17 to 14%.

The Central Bank of South Africa raised its key interest rate by 50 basis points to 4.75%. The Bank is trying to keep inflation within the 3-6% target range, having posted 5.9% in April.