The Swiss Market Index (SMI) and the Swiss franc (CHF) will be in the spotlight this week as the Swiss National Bank (SNB) delivers its interest rate decision. The USD/CHF exchange rate has retreated by almost 8% from its highest point this year while the SMI has retreated by over 4.4% from its highest level this week.
SNB interest rate decision
Central banks have been in focus in the last few days as most of them delivered their rate decisions.
Last week, the Federal Reserve delivered a jumbo rate cut while the Bank of England (BoE) delivered a hawkish pause. Analysts expect these banks to continue cutting interest rates now that inflation is easing and the economy is slowing.
The SNB is expected to deliver another interest rate cut when it meets on Thursday. If it does that, it will slash them by 0.25% to 1.0%. It will be the third interest rate cut this year.
The bank is contending with a complicated issue. Swiss inflation has remained stubbornly high – in Swiss standards – while economic growth is slowing.
Additionally, some key strategic sectors are also not doing well this year. For example, the luxury watchmaking industry is going through a rough patch as international demand, especially in China is slowing.
The situation has worsened such that the government has intervened to ease the burden of some companies in the sector.
One of the top reasons why the Swiss economy is slowing is that the Swiss franc has been significantly stronger against the US dollar and the euro.
Switzerland is mostly an export-oriented country and has a trade surplus of over $56 billion. As such, a stronger franc makes its products more expensive abroad, especially in Europe, its biggest trade partner.
Swiss Market Index analysis
The SMI index has struggled in the past few weeks. While it has jumped by over 16% from its lowest point this year, it has slipped by over 4% from the year-to-date high.
This performance happened because of the strong Swiss franc, which has affected most of the top exporters.
A good example of this is Nestle, the biggest food company in the world whose stock has slumped by over 15% this year. Kuehne & Nagel, a top company in the logistics industry, has droppped 12% this year.
Richemont, a leading player in the luxury goods industry, has dropped by over 15% in the last 30 days.
On the other hand, some Swiss companies like ABB, Holcim, Swiss Re, Givaudan, and Alcon have done well, rising by over 20% this year.
The daily chart shows that the Swiss Market Index formed a double-top chart pattern at CHF 12,435 earlier this year. In most periods, this is one of the most popular bearish signs in the market, which explains why it has pulled back.
The SMI index has moved below the 100-day and 50-day Exponential Moving Averages (EMA) and is hovering at the 23.6% Fibonacci Retracement point.
It has also formed a bearish flag chart pattern, a popular negative sign. Therefore, the index will likely have a bearish breakout as sellers target the 38.2% Fibonacci Retracement point at CHF 11,600, which is about 2.7% below the current level.
USD/CHF technical analysis
The USD to CHF exchange rate peaked at 0.9222 earlier this year and has now plunged by over 7% to 0.8500. It bottomed at 0.8375 and has bounced back to the psychological point at 0.8500.
The pair formed a death cross pattern in August as the 200-day and 50-day Exponential Moving Averages crossed each other.
It has also formed a bearish pennant chart pattern. Therefore, the pair will likely have a bearish breakout, with the next point to watch being at 0.8376, its lowest point this year. A break below that level will point to more downside, with the next point to watch being at 0.8300.
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