FX.co ★ The steep rise of the franc and the crushing fall of the yen

Yesterday, Switzerland made a knight's move, unexpectedly raising rates by 50 bps. Against this background, expectations of the Bank of Japan's capitulation sharply increased. But the BOJ still decided to stand on its own.

In the outgoing week, two major central banks, whose monetary policy remained super-soft in the face of total tightening, decided to go their separate ways.

On Thursday, the Swiss National Bank made a shocking decision to raise interest rates. And this morning, the BOJ finally dispelled rumors about a possible rise in the indicator.

Franc rejoices: SNB takes a hawkish a path

Yesterday's decision by the Swiss central bank on interest rates produced a bombshell effect on the markets.

Of course, many expected that the SNB could decide to increase the indicator in conditions of increased inflation. But did anyone think that it could literally turn from a quiet dove into an aggressive hawk overnight?

The Swiss bank immediately raised the rate by half a percentage point, to 0.25%. The central bank has tightened its monetary policy for the first time in 15 years, hoping to contain inflation, which threatens to get out of control.

Currently, inflation in the country is 2.4% and, according to SNB forecasts, may reach 2.8% by the end of the year. This is significantly higher than the agency's target range of 2%.

The shocking rise in the rate by 50 bps provoked the sharpest growth of the franc in the last seven years. The Swiss currency has risen by almost 3% against the dollar.

The franc also strengthened significantly against the euro. The single currency dropped to 1.0131, showing the strongest drop since June 2016. Recall that the results of the Brexit referendum were published then.

Now analysts expect a further rise of the Swiss currency against the dollar and the franc reaching parity with the euro, as the SNB said that further tightening may be required to combat inflation.

The yen is stormy: BOJ chooses a dovish route

Interestingly, the rise in rates in Switzerland not only triggered the franc rally, but also gave a short-term boost to the yen.

Yesterday, the Japanese currency rose more than 1% against the dollar and reached a 2-week high. The increased threat of a global recession partially contributed to the strengthening of the protective asset.

Investors fear that a series of rate hikes, which this week has been remembered for, will provoke a slowdown in global economic growth.

Recall that on Wednesday the Fed raised rates by 75 bps, and on Thursday the Bank of England (by 25 bps) and the SNB (by 50 bps) reported an increase in the indicator.

The most unexpected, as we have already noted above, was the decision of the Swiss central bank. After the surprise it presented, speculation increased significantly that the BOJ would go the same way.

However, this did not happen. On Friday morning, the BOJ announced that it continues easing monetary policy and keeps interest rate targets unchanged.

This choice left the BOJ completely alone. While other major central banks are tightening their policies to curb rising inflation, the Japanese central bank decides to focus on supporting the economy affected by the COVID-19 pandemic.

The market's reaction to the BOJ's dovish tactics is absolutely logical. Today, the yen is falling as rapidly as it rose yesterday.

At the time of preparation of the material, the yen plunged by almost 1% against the dollar and was trading again at a 24-year low of 134.

Experts predict that in the near future we will see a further depreciation of the yen, which may cause even more damage to the economy, which is heavily dependent on imports of fuel and raw materials.The fact that uncertainty about the Japanese economy is extremely high is also stated in today's BOJ statement. Therefore, it would not be surprising if the regulator decides to turn off the beaten track at its next meeting...