Swiss franc on the top

Last week, to find some volatility one needed look to currency pairs outside the spotlight, i.e. not the EUR/USD. Several events having an impact on Germany weighed on the single currency, which fell to its lowest of the year against the Swiss franc. First was the unexpected resignation of Jens Weidmann, the powerful president of the Bundesbank. A strong proponent of restrictive monetary policy to counter inflationary risks, it seems he grew tired of not being heard and stepped down before the end of his term which was due to run until 2027. Angela Merkel announced that it will be up to the new coalition that emerged from the last elections to appoint Mr Weidmann’s successor. Most likely, the coalition, which will form around the SPD, will appoint a new president who is more favourable to accommodative monetary policy. The monetary policy hawks are thus losing their spearhead in Europe and the single currency has suffered from this development. But on the economic front, too, Germany has had some bad news. The difficulties of the German automotive industry or the somewhat anaemic rebound in tourism during the summer are weighing on the euro. And according to the IFO index, the morale of German entrepreneurs fell again in October. This important index, based on a survey of 9,000 companies, provides a projection of economic activity. It came out to 97.7 points in October, down from 98.9 points in September. Persistent supply problems are hampering economic activity in Germany and slowing the recovery. The Swiss franc, on the other hand, continues to benefit from solid fundamentals: inflation that is much lower than in the eurozone, a more efficient labour market and vigorous economic growth. Also, the International Monetary Fund raised its growth forecasts for Switzerland. GDP for this year is expected to grow by 3.7% compared to 3.5% in the analysis last spring. For 2022, the IMF now expects a rate of 3% against 2.8% previously. The decline of the euro against the franc is of course being closely monitored by the Swiss National Bank. The SNB saw its demand deposits increase by 1 billion francs last week under the effect of probable interventions in order to defend the 1.0650 -1.0700 zone. The institution intervened on a massive scale at the start of the pandemic in spring 2020 to counter the rise in the franc which had risen from 1.0900 to 1.0500. This policy had made it possible to push the single currency back to 1.1000 francs in March this year. But a year and a half after having touched 1.0500, the SNB finds itself almost back to square one. Even if the movement is less abrupt it is tending towards the same point: a still very strong Swiss franc which always attracts capital in times of uncertainty.

The price of oil is the highest it has been since 2014 ($85 per barrel on Monday).  Even more impressive is the rise in the price of natural gas, which has doubled since the start of the year. This surge in energy prices is obviously benefiting the currencies linked to it. Saudi Arabia, through its Minister of Energy, announced that it did not intend to increase its production, as it believes that the recovery is not yet sustainable. The currencies of oil-producing countries are appreciating. The rouble has fallen below the 70 roubles per dollar mark, its best level since June 2020. The Canadian dollar hit 1.2340 against the greenback – a three-month high – and the Norwegian krone, which fell below the 10 kroner per euro mark, is at its highest since late 2019 after peaking at 13 kroner for the euro at the height of the crisis last spring.

The rouble also benefited from a surprise boost from the Central Bank of Russia. The latter completely surprised the markets on Friday by raising its main interest rate by three-quarters of a point. Admittedly, a rise was anticipated by the markets to cope with galloping inflation, but it was the magnitude that nevertheless surprised the markets. What’s more, Governor Elvira Nabiulina said that a 1% increase had been considered. The CBR has thus hiked the rate by a total of 325 basis points for this year. With inflation at 7.4% on an annual basis, Friday’s decision barely puts real rates back into positive territory.

The Turkish lira is still in turmoil. The Central Bank of Turkey lowered its main key rate by 2%, from 18% to 16%, as requested by president Recep Tayyip Erdogan. After the decision the lire experienced a new descent into the abyss and hit a new all-time low at 9.85 lire to the dollar. After an escalation of tensions between Mr. Erdogan and 10 Western countries (United States, Canada, France, Finland, Denmark, Germany, Netherlands, New Zealand, Norway and Sweden) which could have led to increased economic difficulties and possible international isolation, Ankara’s conciliatory tone has allowed the Turkish currency to recover somewhat. But the general market sentiment remains negative.

Lastly, we should note that stock markets remain in fine form. The Dow Jones, the S&P 500 and the SMI all broke new records yesterday during the session.

Central banks are making a big comeback on the agenda with the Bank of Canada today, the Bank of Japan and the European Central Bank tomorrow, and the much anticipated Fed meeting next Wednesday.