USD/CHF strengthens above 0.8100 on renewed US Dollar demand
- USD/CHF drifts higher to near 0.8125 in Monday’s early European session.
- The upbeat Michigan Consumer Sentiment Index supports the US Dollar.
- The Fed is expected to leave interest rates unchanged at the June meeting on Wednesday.
The USD/CHF pair gathers strength to around 0.8125 during the early European session on Monday, bolstered by the rebound in the US Dollar (USD). Investors await the Swiss May Producer and Import Prices and SECO Economic Forecasts, which will be published later on Monday.
The stronger-than-expected Friday’s US economic data lift the Greenback against the Swiss Franc (CHF). The University of Michigan Consumer Sentiment Index improved to 60.5 in June, compared to 52.2 in the previous reading. This reading came in stronger than the 53.5 expected.
Meanwhile, the US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, recovers to near 98.25, adding 0.15% on the day.
The US Federal Reserve (Fed) policy meeting will take center stage later on Wednesday. The US central bank is anticipated to keep interest rates steady at its June meeting. Futures markets expect two rate cuts by year-end, possibly beginning in September, bolstered by softer inflation data last week.
Investors fear that the conflict between Israel and Iran could escalate into a broader regional conflict. This, in turn, could boost the safe-haven currency like the CHF and create a headwind for the pair. Israel started attacks on Iran on Friday, targeting nuclear facilities and missile factories and killing military leaders. Late Sunday, Iran launched a fresh attack on Israel, with an explosion seen in the coastal city of Haifa.
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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