Swiss Franc retreats as markets turn to next week’s Fed interest rate decision
- USD/CHF rebounds from a one-month low as the US Dollar and Treasury yields regain some ground.
- The Fed-SNB interest rate gap continues to weigh on the Swiss Franc.
- Traders await next week's Fed decision for fresh clues on the interest rate outlook.
USD/CHF rebounds on Friday, reversing the previous day’s losses as the US Dollar (USD) regains some ground alongside US Treasury yields. At the time of writing, the pair trades around 0.8250, up 0.56% on the day, after falling to a one-month low of 0.8191 on Thursday.
The Swiss Franc (CHF) benefited from defensive flows on Thursday as concerns over the sustainability of AI-related investments weighed on equities. Investors also sought government bonds, pushing US Treasury yields sharply lower and adding pressure on the Greenback.
However, that move loses momentum on Friday. The benchmark 10-year US Treasury yield recovers toward 5% after falling 16.6 basis points to 4.95% the previous day. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.75 after touching a three-week low of 101.45 on Thursday.
US economic data offer a mixed picture. The preliminary S&P Global Composite Purchasing Managers’ Index (PMI) eased to 57.6 in October from 58.4 in September. Manufacturing improved to 56.0 from 55.9, beating expectations of 55.6, while Services slowed to 57.9 from 58.8, matching forecasts. Meanwhile, the University of Michigan’s final Consumer Sentiment Index was revised up to 48.0 from 46.3. 1-year and 5-year inflation expectations held at 4.7% and 3.5%, respectively.
Attention now turns to next week’s Federal Reserve (Fed) interest rate decision. The central bank is widely expected to hold rates steady after raising them by 25 bps in September. However, the door remains open to another hike before year-end as higher energy prices linked to Middle East tensions threaten to keep inflation above central banks' 2% target for longer.
Against this backdrop, the Swiss Franc remains vulnerable as the SNB maintains its policy rate at 0%, leaving a wide interest rate gap with the Fed. The SNB’s September meeting minutes, released on Thursday, showed little urgency to tighten policy, stating that “the Governing Board deemed current monetary conditions appropriate to ensure price stability over the medium term.”
Policymakers noted that “inflation is likely to increase again somewhat in the short term due to higher energy prices,” while adding that “an increased willingness to intervene in foreign exchange markets is no longer necessary in the current environment.”
SNB FAQs
The Swiss National Bank (SNB) is the country’s central bank. As an independent central bank, its mandate is to ensure price stability in the medium and long term. To ensure price stability, the SNB aims to maintain appropriate monetary conditions, which are determined by the interest rate level and exchange rates. For the SNB, price stability means a rise in the Swiss Consumer Price Index (CPI) of less than 2% per year.
The Swiss National Bank (SNB) Governing Board decides the appropriate level of its policy rate according to its price stability objective. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame excessive 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.
Yes. The Swiss National Bank (SNB) has regularly intervened in the foreign exchange market in order to avoid the Swiss Franc (CHF) appreciating too much against other currencies. A strong CHF hurts the competitiveness of the country’s powerful export sector. Between 2011 and 2015, the SNB implemented a peg to the Euro to limit the CHF advance against it. The bank intervenes in the market using its hefty foreign exchange reserves, usually by buying foreign currencies such as the US Dollar or the Euro. During episodes of high inflation, particularly due to energy, the SNB refrains from intervening markets as a strong CHF makes energy imports cheaper, cushioning the price shock for Swiss households and businesses.
The SNB meets once a quarter – in March, June, September and December – to conduct its monetary policy assessment. Each of these assessments results in a monetary policy decision and the publication of a medium-term inflation forecast.
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