Swiss Franc gains as easing risk aversion weighs on US Dollar
- Easing tensions in the Strait of Hormuz reduced safe-haven demand for the US Dollar, causing the pair to depreciate.
- The US, Iran, and Oman are expected to close an interim deal to reopen the Strait of Hormuz, targeting a Wednesday announcement.
- BBH’s Elias Haddad says low Swiss inflation and a steady SNB keep weighing on the Franc, G10's weakest currency this quarter.
USD/CHF extends its losses for the second successive day, trading around 0.8080 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) loses ground as safe-haven demand recedes amid growing diplomatic momentum surrounding a potential agreement to reopen the Strait of Hormuz.
Axios reported that the United States (US), Iran, and Oman are closing in on an interim agreement to reopen the Strait of Hormuz, with the US aiming for a Wednesday announcement. The report also stated that the deal under discussion sets up a 60-day temporary arrangement between Oman and Iran in the Hormuz Strait, a critical chokepoint to almost 20% of global energy supply, which could be extended.
However, the US Dollar could find minor support from a recovery in the benchmark 10-year US Treasury yield after it dipped toward 4.61% on Tuesday. That initial decline in yields was driven by falling energy prices, which helped cool inflation fears and tempered expectations of a hawkish response from the Federal Reserve (Fed).
Schmid flags AI-driven inflation risks, backing tighter Fed stance despite resilient growth
Fed’s Schmid delivered a modestly more hawkish message than relative to the historical average, with a 7.3/10 FXS Speechtracker score versus a 7/10 baseline, stressing that the current policy stance is “not tight” and that tighter monetary policy is required to return inflation to the 2% target. The emphasis on AI-related investment as a fresh inflation driver, the warning that recent disinflation is too tentative to confirm an easing trend, and the view that inflation remains “too high” and “worrisome” all reinforce a bias toward further restraint even as growth and the labor market are described as resilient and roughly balanced. By highlighting the PCE gauge as the preferred inflation metric and cautioning that energy relief may be temporary, the speech leans clearly toward guarding against upside price risks rather than validating imminent rate cuts.
The FXS Fed Sentiment Index slipped by 0.96 points to 145.80, signaling a slight pullback in perceived hawkishness following the speech. However, with the FXS Fed Sentiment Index still far above the neutral 100 line, the Fed remains firmly in hawkish territory despite the marginal softening, consistent with the elevated FXS Speechtracker reading and Schmid’s focus on persistent inflation risks.
Analysts at Brown Brothers Harriman note that Swiss price pressures remain very subdued, with July inflation coming in “in line with consensus.” They highlight that “headline CPI printed at 0.4% y/y vs. 0.5% in June while core CPI remained at 0.3% y/y for a fourth straight month,” reinforcing the Swiss National Bank’s assessment of only modest inflation over the forecast horizon and helping to keep the policy rate anchored at 0.00%. In this context, Elias Haddad at BBH argues that the persistently low inflation backdrop and steady SNB stance continue to weigh on the Swiss Franc, which has been the weakest G10 currency so far this quarter.
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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