USD/CHF softens to near 0.7950 as Venezuela crisis supports Swiss Franc
- USD/CHF weakens to around 0.7950 in Wednesday’s early European session.
- Venezuela turmoil boosts the safe-haven demand, supporting the Swiss Franc.
- Fed governor Miran said 'aggressive' rate cuts are needed.
The USD/CHF pair trades in negative territory near 0.7950 during the early European session on Wednesday. The US Dollar (USD) weakens against the Swiss Franc (CHF) amid persistent geopolitical tensions and dovish comments from the US Federal Reserve (Fed) officials. Traders will keep an eye on the US ISM Services Purchasing Managers Index (PMI) report later on Wednesday.
The US military conducted a major operation in Caracas, capturing Venezuelan President Nicolás Maduro and his wife on Saturday. They were transported to the United States and appeared in a New York federal court on Monday, pleading not guilty to narco-terrorism, weapons, and corruption charges. Following the operation, US President Donald Trump declared that the US is "in charge" and would "run" Venezuela for a transition period.
The Wall Street Journal reported on Wednesday that Russia has deployed a submarine and other naval vessels to escort an aging oil tanker off the coast of Venezuela. Traders will closely monitor the developments surrounding Venezuela's turmoil. Any signs of escalating tensions between the US and Venezuela could boost the safe-haven flows, benefiting the CHF against the Greenback.
Furthermore, dovish signals from the US central bank might weigh on the USD. Fed governor Stephen Miran, whose term ends at the end of January, noted on Tuesday that the Fed needs to cut interest rates aggressively this year to keep the economy moving forward. Meanwhile, Minneapolis Fed President Neel Kashkari stated that he sees a risk that the jobless rate could "pop" higher.
Swiss Franc FAQs
The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.
The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.
The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.
As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.
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