The Swiss franc hit a new high Thursday. What about Euro and USD?
The Swiss franc skyrocketed on Thursday. The Swiss National Bank (SNB) announced a surprise interest rate increase, triggering its currency’s biggest daily jump versus the euro since the bank ditched its currency peg in 2015.
On a volatile day for the Sterling, the British currency tumbled down after the Bank of England decided to hike interest rates by 25 basis points (bps). The central bank confounding forecasts by some investors of a bigger increase to fight surging inflation.
Moreover, the SNB joined other central banks in tightening monetary policy. It reported its first rate hike in 15 years, raising its policy rate to -0.25% from the -0.75% it has deployed since 2015.
On Thursday, the Swiss franc rallied to a two-month high against the common currency. It was set for its best day against the Euro since January 2015. The franc jumped by 1.8% versus the euro at 1.0200 as of 1118 GMT. It also surged forward by 1.4% to 0.9807 against the dollar, remaining on track for its best single-day versus the U.S. currency in almost one month.
Jane Foley, the head of FX strategy at Rabobank in London, noted that the SNB move came as a big shock. According to her, talk had been building that the bank could start to move away from its deeply negative position on rates under cover of the more hawkish ECB. However, today’s 50 bps move was still a big surprise.
Most analysts had thought the SNB would hold rates on Thursday, flagging a hike for September instead, but a couple of banks had predicted a 25 bps move.
How much did the Sterling lose?
The British Pound plummeted by 0.8% to $1.2085 on Thursday, trading near a two-year low touched this week. The BoE increased borrowing costs for the fifth time since December in a bid to combat inflation despite concerns about a sharp slowdown in the British economy.
Francesco Pesole, the FX strategist at ING, noted that the Forex market’s expectations had leaned a bit more towards a 50bp move after the 75bp rate increase by the Fed on Wednesday, as well as the 50bp hike by the SNB this morning. Despite that, the forward-looking message is still broadly hawkish. That doesn’t challenge the hawkish pricing on the Bank of England’s tightening by year-end (six more increases), ultimately limiting the Pound’s downside for now.
The BoE stated that it was ready to act forcefully as there were some indications of more persistent inflationary pressures. Before the BoE and SNB moves, the U.S. Federal Reserve had announced a 75 bps rate hike on Wednesday. The European Central Bank also hinted last week that it would raise its rates in July.
On the other hand, the SNB and Bank of Japan remain the only two major developed world central banks that aren’t planning to flag higher rates in a tightening cycle that started late in 2021.
Investors are currently closely watching several ECB speakers. After an emergency meeting on Wednesday, the central bank promised to control borrowing costs for the eurozone’s periphery countries.
Against the dollar, the euro dropped by 0.4% to $1.0402 on Thursday, trading near a one-month low touched yesterday.
Amidst worsening market risk sentiment, the safe-haven greenback soared against a basket of other major currencies. It came near to a 20-year high reached before the Fed upped borrowing costs on Wednesday. Today, the dollar index added 0.3% to 105.09.
What about the EM currencies?
Most emerging market stocks plunged on Thursday, with Asian equities leading the decreases after the Fed’s steep interest rate hike. Currencies in the developing world also suffered as a firm dollar weighed on them. The MSCI’s index for EM equities dropped by more than 1%. It’s now heading for its worst week since March.
China stocks declined by 0.6% each, while Hong Kong shares shaved off 2.5%. However, the MSCI’s index for developing world currencies climbed up by 0.1%. Despite that, the Turkish lira continued its losing streak to the ninth consecutive session. In addition, Russia’s rouble lowered against the U.S. dollar.
On the other hand, Hungary’s forint rose from record low territory after its central bank unexpectedly increased its one-week deposit rate by 50 bps to 7.25% at a weekly tender. The bank stepped up its policy tightening to fight stubborn and surging inflation that is now running in double-digits.