Optimistic general sentiment as a whole

During the COVID crisis last spring, the Swiss National Bank had to engage in massive forex interventions to keep the franc from appreciating further than CHF 1.0500 against the euro. Demand deposits with the SNB reflected these interventions and increased the most during the worst of the crisis. From autumn last year, and mainly due to the prospect of vaccination, pressure on the franc has eased. And since January of this year, it has lost ground against all major currencies including the US dollar, the euro, the British pound and the Canadian, New Zealand and Australian dollars. Growing optimism in the financial markets that the pandemic can be controlled in the near future has made the franc less of a safe haven. Currencies considered riskier as well as commodity-linked currencies have particularly appreciated against the franc in recent weeks. The euro has also made a comeback, and now trades above CHF 1.1000. Even as vaccination goes slowly, the general sentiment is optimistic as a whole, and there is limited probability that eurozone rates will suffer further cuts. Even if the EURCHF pair has seen impressive movement since mid-February, it is part of the decline in safe-haven values also seen in the yen and gold. The SNB is therefore making the most of this upturn but it will nevertheless stay on guard and will not want to change its expansionary monetary policy stance until it is totally certain that the pandemic has been overcome. Last week and the week before, demand deposits at the SNB remained unchanged, perhaps declined slightly, indicating no interventions by the bank. It discourse will surely remain very prudent, however, at the next monetary policy meeting to be held on 25 March.

The US dollar continues to do well against all currencies, aided by favourable economic data and increasing long-term rates. The increase in bond yield took 10-year US rates above 1.5% last Thursday – the highest since the pandemic broke out. The increase reflects expectations of a more dynamic economic recovery. During his two days before the Senate, Fed Chair Jerome Powell said he was optimistic that a solid economic recovery in the second half of this year was possible if the pandemic was under control. He also stated he did not fear a sustained rise in inflation at this point. Richard Clarida, reiterated that the Fed would not raise rates until inflation had reached 2% and the country had returned to full employment. The Fed believes inflation should not exceed its target for at least 3 years. These positive comments reassured investors and propelled the Dow Jones to a new all-time high of 32,009.64 points last Wednesday.

Other currencies are also seeing this rise in long rates, which is prompting some central banks to react. On Monday, François Villeroy de Galhau, one of the members of the ECB Governing Council, considered that the recent rise in bond yields was not justified. Fabio Panetta, governor of the Bank of Italy and a member of the ECB’s executive board, advocates increasing bond buybacks in order to lower rates so that the rise does not jeopardise the ECB’s strategy. The Bank of Japan is also ready to defend its target rates if they were to increase. Analysts consider that it could intervene if the 10-year sovereign bond yield came close to 0.20%. The Australian central bank announced it was doubling of its asset buybacks to temper the rise in long rates after the 10-year sovereign bond rose from 1.1825% to 1.8980% between 11 and 26 February.

The barrel of WTI crude fell slightly from last Wednesday after hitting $63.53. Tomorrow, a meeting of OPEC and its partners will be held that could lead to a relaxation of production quotas. There are tensions within the cartel: Saudi Arabia would like to maintain the current production cuts at least until April while Russia is pushing to increase production. At the first summit in 2021 in January, the OPEC+ 23 alliance agreed after two days of difficult negotiations to gradually increase production until March, postponing the decision on the policy from April until then.

The following major central banks will hold meetings in March: on the 10th for the Bank of Canada, the 11th for the ECB, the 17th for the FED, the 18th for the Bank of England, the 19th for the Bank of Japan and the Central Bank of Russia and the 25th for the SNB.