(Bloomberg) -- Traders in Switzerland and Israel are once again testing central banks in their commitment to currency intervention.
Policy makers in both nations have been known to weaken their respective currencies to support their economies. Investors are now pushing back amid a brighter outlook for growth and inflation, putting the Swiss National Bank and the Bank of Israel in a tight spot.
The Israeli shekel surged on Tuesday to the strongest level in more than 25 years, before reversing gains as the central bank declined to comment on currency intervention. The Swiss franc hit a 17-month high against the euro on Monday, before pulling back the following day.
“The FX market is testing Israel and Switzerland's commitments to current policy settings via the exchange rate, to which they have both proved highly sensitive,” said Ray Attrill, head of FX strategy at National Australia Bank Ltd.
Switzerland and Israel are gaining focus amid a broad inflation-driven shift in global markets. Gyrations in their currencies come after the Reserve Bank of Australia abandoned a bond-yield target on Tuesday, following a selloff that pushed yields more than eight times higher than the central bank's goal.
Bond Rout Forces Australia Policy Shift in Lesson for the World
As traders ramp up bets for monetary policy tightening, that's forcing central banks to balance traders' expectations with a need to support a still-fragile economic recovery. The Federal Reserve, Bank of England and European Central Bank are among those confronting accelerating bets for rate hikes.
Roll Back
The BOI said last month that it will roll back its 85-billion-shekel ($27 billion) bond-purchase program by year-end. Meanwhile, the SNB is expected to keep its current policy rate at -0.75% this year and maintain a pledge to wage currency market interventions, if necessary.
The shekel fell 0.6% to 3.1364 per dollar at 10:14 a.m. in New York after earlier touching 3.1008, the strongest level since March 1996. Record-breaking foreign direct investments and the central bank's shift toward a hawkish stance had boosted the currency.
The franc weakened 0.3% to 1.0585 per euro a day after gaining to the strongest level since May 2020. Traders are anticipating more price swings for both currencies. One-month implied volatility on dollar-shekel is at the highest since May, while a similar measure for the euro-franc cross is at a two-month high.
“The market is aware that the critical mark is around 1.05,” Commerzbank FX analyst Thu Lan Nguyen said of the euro-franc pair. “The fact that we are hovering just above it suggests to me that the market is still somewhat afraid of SNB action.”
The Bank of Israel began in January a $30 billion foreign-exchange purchase program to help the country weather the coronavirus pandemic. While the bank has already purchased $28.3 billion, it will act in the foreign-exchange market as needed even after the program is tapped out, Governor Amir Yaron has said.
In Switzerland, higher inflation readings are giving the SNB less of a reason to keep up its currency interventions. That could lead to further appreciation in the franc, Paul Meggyesi, head of FX strategy at JPMorgan Chase & Co. wrote in a note Monday.
But while Switzerland's inflation rate has increased in recent months, it's still far away from the 2% level that would have the central bank consider a rate hike. It hit 1.3% in October, and the central bank sees it averaging at 0.5% this year and only 0.7% in 2022.
“Any tapering in the SNB's liquidity policy in response to the onset of inflation will automatically feed-through to the exchange rate because this will entail less intervention, and in the extreme case, no intervention,” Meggyesi said.
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