Liquidity management has characteristically affected the Swiss franc due to the use of Foreign Exchange Swaps. If the Bank wishes to inject liquidity, it buys foreign currency (primarily dollars) against Swiss francs, thereby pressuring the currency.
As of December 1999, the Bank shifted from a monetarist approach (targeting money supply) to an inflation-based approach namely; a 2.00% annual inflation rate. The Bank will use a range in the 3-month London Interbank Offer Rate (LIBOR) to stir monetary policy in order to achieve the 2.00% inflation target.
SNB officials can affect the Swiss Franc by making occasional remarks on liquidity, money supply or the currency itself. Here are the key SNB officials:
Hans Meyer: President
Jean-Pierre Roth: Vice President
Bruno Gehrig: Member of Governing Board (tipped to be the next Bank Chief)
Georg Rich: Chief Economist
Interest Rates: The SNB uses the discount rate to announce changes in monetary policy. These changes have a significant impact on the currency. The discount rate, however, is rarely used at the Bank’s discount facility.
3-month Euroswissfranc Deposits: The interest rate on 3-month Swiss-denominated deposits held in banks outside Switzerland. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on USD/CHF, the greater the interest rate differential in favor of the eurodollar against the euroswiss deposit, the more likely USD/CHF is to rise. Sometimes, this relation does not hold due to the confluence of other factors.
Swiss franc’s Changing Role as a Safe-Haven Status: The Swiss franc has historically enjoyed an advantageous role as a “safe” asset due to: SNB independence in preserving monetary stability; secrecy of the nation’s banking system; and the neutrality of Switzerland’s political position. Moreover, the SNB’s relatively hefty gold reserves had largely contributed to the franc’s solidity. Even as the currency’s international role starts to wane in the mid-1990s (partly due to the emergence of the dollar and fall in gold), the Swiss franc remains a valuable alternative in Forex markets.
Economic Data: The most important economic data items released in Switzerland are: M3 (broadest measure of money supply), CPI, unemployment, balance of payments, GDP and industrial production.
Cross Rate Effect: USD/CHF is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates), such as EUR/CHF or GBP/CHF. To illustrate: A rise in GBP/CHF that is triggered by an interest rate hike in the UK, could extend the franc’s weakness against other currencies, including the dollar.
3-month Euroswiss Futures Contract: The contract reflects markets expectations on 3-month euro swiss deposits into the future. The difference between futures contracts on the 3-month eurodollar and euroswiss deposits is an essential variable in determining USD/CHF expectations. Other factors: Due to the proximity of the Swiss economy to the Eurozone (specifically Germany), the Swiss franc has exhibited a considerably positive correlation with the euro. The relationship is most prominent in the highly negative correlation between USD/CHF and EUR/USD. To illustrate, a sudden move in EUR/USD (triggered by a major fundamental factor) is most likely to cause an equally sharp move in USD/CHF in the opposite direction. The relationship between these two currency pairs is one the strongest in currency markets.
Source : DIAMOND B. - 5 Minute Forex
