Massive selloff: Swiss Franc plunges 2% in five days amid growing SNB-Fed divergence

Over the past five trading days, the Swiss Franc (CHF) has experienced significant losses, reaching 16-month lows against the US Dollar (USD). This decline was triggered by a hawkish shift from the Federal Reserve (Fed), which increased its monetary policy divergence with the Swiss National Bank (SNB). The Fed raised interest rates by 25 basis points to the 3.75%-4% range, leading to a surge in the USD/CHF pair to the mid-0.8200s.

However, Chairman Kevin Warsh's unexpectedly hawkish comments at a press conference further bolstered the USD, restoring confidence in the central bank's independence and boosting long-term yields. In contrast, the SNB is expected to maintain its benchmark interest rate at 0% for the foreseeable future, deepening the monetary policy divergence with the Fed.

Recent Swiss data revealed that consumer inflation accelerated to 0.8% year-over-year in August, compared to 0.4% in July, prompting SNB President to confirm that "the wind has changed on interest rates." Despite this, markets do not seem to anticipate any imminent monetary policy changes from the SNB. Strategists at Societe Generale consider the CHF as a preferred funding currency for carry traders, while the market remains comfortable with short CHF, short GBP, and short NZD positions.

Central banks' primary mandate is to maintain price stability within their respective regions, with the task of adjusting interest rates to control inflation or deflation. The US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) aim to keep inflation close to 2%. Central banks employ the benchmark policy rate as a tool to influence inflation, either by tightening or easing monetary conditions.

When interest rates are raised, it is known as monetary tightening, while a cut in rates is referred to as monetary easing. The central bank is typically politically independent, with members of its policy board having varying views on how to control inflation and maintain the desired monetary policy.