Strong divergences

Jun 24, 2020
  • EUR/USD 1.1315
  • DOW JONES 26’156.10
  • USD/CHF 0.9440
  • SMI 10‘246.56
  • EUR/CHF 1.0680
  • CRUDE OIL 40.40
  • USD/RUB 68.79
  • XAU/USD 1’768.00
The Swiss National Bank held its key rate steady at -0.75% last week, as had been unanimou...


The Swiss National Bank held its key rate steady at -0.75% last week, as had been unanimously expected. The SNB reaffirmed its commitment to an ultra-expansive monetary policy on Thursday, saying that these unconventional measures will help Switzerland weather its deepest recession in decades. ‘We are ready to intervene more strongly’, said Chairman Thomas Jordan in an interview. The bank has admitted that it has carried out significant interventions on the foreign exchange market to keep the franc from appreciating further, which would spell out more trouble for Swiss exports. According to various estimates, the SNB has sold between 70 and 100 billion francs since the start of the year and particularly since the beginning of March. In an interview published in the NZZ, Vice-Chairman Fritz Zurbrügg declared that in principle there were no limits to the interventions. When asked about the risk that Switzerland would be deemed a currency manipulator by the United States, he said that the institution was in regular contact with the American authorities, that Switzerland is a special case because of its particularly open economy, and that it could not be said that the Swiss franc was weak. The interventions are not intended to weaken the franc but to temper its appreciation. For Thomas Jordan ‘the situation has calmed down a bit again’ since the end of May and after the EU announced a €750-billion stimulus plan.


But this respite may prove to be short-lived because as one might expect the four ‘frugals’ – the Netherlands, Austria, Sweden and Denmark – have significant reservations regarding this plan, which will primarily benefit the countries of the South, and no agreement has been reached so far. The EU-27 have to overcome important differences, be it the magnitude of the plan, its duration or the balance between loans and grants.  European leaders have planned to meet in person in mid-July in Brussels – the previous summit took place by videoconference – to try an come to a quick agreement on the criteria for the distribution of aid as well as the delicate question of ‘conditionality’, i.e., what will be expected of a State – reforms, for example – in exchange for these funds. The president of the European Central Bank, Christine Lagarde, sees this as an opportunity to ‘prove that Europe is back. The faster the package is agreed, the better for the EU economy’, she told the leaders of the EU-27.


Furthermore, trade tensions between China and the US, military tensions between China and India and new coronavirus outbreaks in Germany, the US, China and Brazil are injecting the markets with a significant dose of uncertainty. This uncertainty is keeping the pressure on the traditional safe heavens, i.e. the Swiss franc, the Japanese yen, and gold. The price of gold is thus rising with the risks of a second wave of COVID-19 and the prospect that interest rates will remain low in most countries for a long time. The last time the precious metal traded at such a high dollar value it was the autumn of 2012, in the middle of an EU crisis.


In Russia, the Central Bank reduced its key rate to an all-time low of 4.5%. The bank cut the rate by 1% as analysts expected – Governor Elvira Nabiullina had largely hinted at it last month.  Due to stronger than expected exposure to disinflationary factors, falling retail sales (-19.2% in May year on year), and a 6.1% unemployment rate in May after 5.8% in April and 4.7% in March, Ms Nabiullina said that the Monetary Policy Committee would decide in July whether to hold the rates steady or slash them again. The market is currently leaning towards a further cut to the key rate ranging between 0.25% and 0.50%.


The Central Bank of New Zealand kept its key rate unchanged at 0.25%. The Bank has acted with caution, indicating that it is ready to use other monetary tools if necessary to support the economy, while confirming its target of buying assets for up to 60 billion New Zealand dollars. It also noted that the strong currency had penalised exports.