Swiss Franc Rallies As SNB Retains Key Rate

Swiss Franc Rallies As SNB Retains Key Rate, Revises 2009 Growth Outlook

The Swiss currency traded higher against its major opponents on Thursday morning in New York after the Swiss central bank retained its key interest rate and revised its growth outlook for 2009 after economic conditions improved in the third quarter. The franc thus stayed near a 14-month high against the US dollar, 3-week high against the Japanese yen and moved closer to yesterday's fresh 4-month high against the pound.

The Swiss National Bank left its three-month libor target range unchanged at 0-0.75%, as expected. In effect, the bank kept its key interest rate unchanged at 0.25% for the second rate setting session.

The central bank said it will continue providing a generous supply of liquidity and, if necessary, to purchase Swiss franc bonds with a view to reducing risk premia on long-term debt instruments issued by private sector borrowers.

In addition, it will continue to act decisively to prevent any appreciation of the Swiss franc against the euro.

Citing the signs of improvements in the global economy, the SNB revised its GDP growth forecast for the current year. It now expects Switzerland's real GDP to fall by between 1.5% and 2%. That compares with a June prediction of a GDP fall between 2.5% and 3%.

The SNB also revised its inflation outlook for 2010 and 2011. According to the latest forecast, average annual inflation for 2009 would be negative, at 0.5%. Prices are expected to rise 0.6% in 2010 and 0.9% in 2011.

Rebounding from its recently hit 2-day low, the Swiss franc advanced near a 0.7 percent against UK's sterling to touch 1.6992 by 10:25 am ET. The franc thus headed closer to yesterday's 4-month high of 1.6987 against the pound. The pound-franc pair is currently quoted at 1.702, compared to 1.7028 hit late New York Wednesday.

UK's retail sales remained flat in August, the Office for National Statistics said today. On a yearly basis, retail sales volume climbed 2.1%. Economists were looking for a monthly 0.1% rise and annual 2.7% increase.

Inflation expectations in the UK were steady in August, results of the Bank of England/GfK NOP inflation attitudes survey revealed today. In its quarterly survey, the BoE said median expectations of the rate of inflation over the coming year were 2.4%, the same response as in May.

The Swiss franc also advanced to 1.5167 against the European currency by 10:45 am ET, up by more than 0.4 percent from a 20-day low of 1.5235 hit around 8:00 am. On the upside, resistance is seen around the 1.513 level.

First Estimates released by Eurostat, the statistical agency of the European Commission, revealed that the euro area's trade balance showed a surplus of 12.6 billion euros on a seasonally adjusted basis in July compared to a deficit of 3.5 billion euros in the year-ago period. Economists had expected the surplus to come in at a much more modest 1.1 billion euros.

Another report released by Eurostat showed today that construction output declined by a bigger than expected 2% in July compared with the previous month. Economists had estimated a more modest 1.1% drop for the month. In June the output was down 0.3%.

The Swiss franc climbed to a 20-day high of 88.81 against the Japanese yen before moving on holding pattern around 10:00 am ET. The next upside target for the franc-yen pair is seen around the 89.5 level. The pair was worth 88.16 at Wednesday's close.

Today, the Bank of Japan decided to leave the key interest rate unchanged as expected to support recovery and raised its economic assessment. In its Monetary Policy Meeting, the Policy Board of the BoJ decided by a unanimous vote to maintain the uncollateralized overnight call rate at 0.1%. The last change in the rate was a 0.1% cut in interest rates at the December 2008 meeting.

The Swiss franc rose to 1.0278 against the US dollar by 10:50 am ET, the highest level since July 22, 2008. The domestic unit has thus advanced more than 4 percent against the buck thus far this month. The greenback-franc pair that closed yesterday's deals at 1.0322 is currently quoted at 1.0298.

In the US, the Commerce Department released a report on today showing that housing starts rose 1.5 percent to an annual rate of 598,000 in August from the revised July estimate of 589,000. Economists had expected starts to edge up to 583,000 from the 581,000 originally reported for the previous month.

The U.S. Labor Department revealed that initial jobless claims came in at 545,000 for the week ended September 12. This was down 12,000 from the previous week's revised total. Economists had expected claims to rise to about 575,000.

Later, the Philly Fed said its index of manufacturing activity rose to 14.1 in September from 4.2 in August, with a positive reading indicating growth in the sector. Economists had been expecting a more modest increase by the index to a reading of 8.0.