Swiss Franc strengthens on weaker US Dollar, inflationary pressure
- USD/CHF depreciates as the US Dollar declines due to the Democratic midterm sweep and falling oil prices.
- Strong ADP hiring numbers and steady ISM service growth continue to support Fed rate hike expectations.
- October's unexpected 1.5% Swiss inflation rise fuels doubts that the SNB can avoid raising interest rates through 2027.
USD/CHF extends its losses for the second consecutive day, trading around 0.8140 during Asian hours on Thursday. The pair depreciates as the US Dollar declines following a Democratic sweep in the US midterm elections, which handed Democrats control of both houses of Congress and raised concerns over potential political gridlock in Washington. Additionally, market expectations of a swift end to the Middle East conflict triggered a sharp decline in oil prices, putting further downward pressure on the Greenback.
However, the Greenback may gain support as resilient domestic economic data reinforced expectations for a Federal Reserve rate hike. The ADP employment report showed private-sector hiring increased by 86,000 in October, beating expectations of 69,000, despite September’s figure being revised down to 86,000 from 90,000. Meanwhile, the ISM Services PMI slipped slightly to 54.5 from 54.9, just below the 54.8 forecast, but remained firmly in expansion territory.
The CME FedWatch Tool indicates that markets are pricing in nearly an 82% chance of another rate hike in December. Investors are now awaiting key upcoming economic indicators, including weekly US Initial Jobless Claims on Thursday and the Nonfarm Payrolls (NFP) report on Friday.
The Swiss Franc (CHF) receives support against its major peers as Swiss inflation unexpectedly rose to 1.5% year-on-year in October, raising doubts over whether the Swiss National Bank (SNB) can avoid tightening policy through 2027.
USD/CHF bears need a clean break of 0.8140, says UOB
Strategists at UOB Group maintain a cautiously negative bias on USD/CHF over the 1–3 week horizon, but stress that further downside now hinges on a decisive break of key support. They recall that they “revised our view to slightly negative last Friday (30 Oct, spot at 0.8240), highlighting that USD ‘could edge lower, but any decline should stay within a 0.8190/0.8290 range.’” However, after USD “broke clearly below 0.8190,” UOB noted yesterday that “downward momentum is increasing rapidly, and USD could decline to 0.8165, potentially testing 0.8140.” The pair subsequently “dropped to 0.8148 before rebounding strongly,” and with that rebound, the bank judges that “downward momentum has slowed.” From here, UOB argues that “USD must break and hold below 0.8140 before further declines can be expected,” with “the next level to watch below 0.8140” at “0.8110.” On the topside, they add that “a break above 0.8220 (‘strong resistance’ level was at 0.8255 yesterday) would mean that USD is not declining further.”
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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