Swiss Franc hits fresh monthly lows amid a hawkish Fed, higher US yields
- USD/CHF rallies to fresh one-month highs at 0.8368, on track for its strongest weekly rally in two years.
- Rising bets of a jumbo rate hike by the Fed in December are boosting the US Dollar across the board.
- ING experts point out to 0.8400 as a key level for the pair.
The US Dollar (USD) maintains its bullish tone against the Swiss Franc (CHF) on Friday, buoyed by higher US Treasury yields, as Federal Reserve (Fed) officials open the door for a 50-basis-point rate hike in December. The USD/CHF appreciates for the fourth consecutive day, reaching session highs at 0.8368 so far, on track for its best weekly performance in two years.
Speculative traders have ramped up US Dollar long bets this week, as the overshoot Consumer Price Index (CPI) figures released on Tuesday prompted Federal Reserve (Fed) officials to bring up the possibility of a jumbo rate hike in December.
Fed Governor Christopher Waller affirmed on Monday that if consumer inflation rose to 0.3% or higher in October, “hiking only 25 basis points would put our credibility at risk”. The CPI finally rose 0.4% in October. A few days later, Dallas Fed President Lorie Logan shared that view, assuring that “the FOMC needs to implement at least two more 25-basis-point rate increases.”
Dollar strength puts pressure on Franc and Yen as key USD/CHF level comes into focus
Market expectations that the Fed might finally go big in December have increased to 13% from none one week ago, according to data by the CME’s FedWatch Tool. In this context, the US two-year Treasury yield has jumped about 32 basis points this week, while the yield of the benchmark 10-year note rallied 27 basis points, returning above 5%. This has sent the US Dollar surging against its most peers.
Analysts at ING note "the low-yielding Swiss franc and the Yen have some of the highest correlations with US rates and are under pressure."
"0.8400 is a really important resistance area for USD/CHF and will probably help determine whether the dollar needs to take another big leg higher over the coming weeks,“ say the ING experts in a note.
In Switzerland, Producer Price Index (PPI) figures, released earlier on Friday, revealed that inflation accelerated to a 0.9% year-over-year rate in October from 0.3% in September against market expectations of a moderate slowdown to 0.2%. The Monthly PPI rose to 0.9%, largely reversing September’s 0.2% drop. The data, however, does not change the view that the Swiss National Bank (SNB) will keep its monetary policy unchanged in the near term.
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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