The correlation coefficient between USDCHF and the spread between the US and Swiss 10-year notes has risen to 0.76 (bottom chart on the left). The increase in correlation started on 16 June. The top chart on the left shows a significant drop in the spread matched by a decline in the USDCHF, the middle chart on the left (red arrows).
The SNB raised its Policy rate by 50 bps, from -0.75% to -0.25%, on 16 June. This move is the central bank's first increase since 2004. Moreover, it had been at -0.75 for nearly six and a half years. I.e. it is significant because the economics have changed enough for the SNB to act. However, we believe this to be secondary.
The day before, on the 15 June, the Fed increased the rates by 75 bps. Higher than the previously communicated 50bps and the most aggressive since 1994. Fed members also indicated a much faster cycle of increases, with a terminal rate of 3.4%.
Given the vast chasm between the SNB and Fed, we believe the widening 10-year spread to be significant. Our interpretation is that the market is growing wary of recession risk in the US. To this end, the US 10-year Treasury is pulling back more than the Swiss 10-year bond (charts on the right). The reaction of the US Treasury, in particular, on 16 June is telling in this regard (top blue arrow). Moreover, the CHF has traditionally been a haven and is likely a beneficiary of the market concerns. Therefore, USDCHF will be a currency pair to keep an eye on. However, we urge caution as the SNB has a history of directly intervening and will be watching the CHF appreciation carefully.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.