Swiss Franc weakens as US Dollar gain support on hawkish Fed outlook
- USD/CHF rises as markets price in a 56.5% chance of another rate increase in October.
- Fed Chair Kevin Warsh stresses that persistent inflation remains too high, signaling further tightening.
- The Swiss Franc weakened due to a wider US interest rate gap and shifting carry-trade dynamics.
USD/CHF gains ground after two days of losses, trading around 0.8230 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) gains support amid hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook. Last week, the US Federal Reserve delivered a 25-basis-point rate hike, its first hike in three years, as officials sought to curb inflation and flagged more hikes in the coming months.
Markets are now pricing in nearly a 56.5% chance of another US rate hike when the Fed meets next in October, compared with nearly 42.5% a week ago, according to the CME FedWatch tool. Fed Chair Kevin Warsh said that "the plain fact is that inflation is too high and has been for too long." "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," he added.
The USD/CHF pair gains support as the Swiss Franc (CHF) has weakened due to a widening interest rate differential with the United States and intense selling pressure driven by new carry trades.
This shift is largely attributed to the Federal Reserve delivering its first-rate hike in three years, which significantly boosted demand for the greenback. At the same time, the Bank of Japan's policy tightening, combined with a historic Washington–Tokyo intervention to support the yen, has reduced the Swiss Franc's appeal as a primary funding source for carry trades.
SNB seen on extended hold as Swiss growth outperforms but inflation stays muted
Economists at ING expect the Swiss National Bank to maintain its current stance, stating that “we expect the Swiss National Bank to keep its policy rate at 0% next Thursday and to remain on hold over the coming quarters.” They argue that stronger-than-expected Swiss growth and a slightly weaker Franc have not yet translated into problematic price pressures, allowing the SNB to keep policy accommodative for longer while inflation remains subdued.
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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