USD/CHF rebounds from 0.9000 mark, over one-week low amid modest USD strength
- USD/CHF edges higher and snaps a three-day losing streak to over a one-week low.
- A modest USD strength offers some support to the major amid a positive risk tone.
- Fed rate cut bets might cap the USD and warrant caution for aggressive bullish traders.
The USD/CHF pair defends the 0.9000 psychological mark and attracts some dip-buyers during the Asian session on Thursday, snapping a three-day losing streak to over a one-week low touched the previous day. Spot prices currently trade around the 0.9030 area, up over 0.15% for the day, though the fundamental backdrop warrants caution before confirming that this week's sharp pullback from the 0.9200 neighborhood has run its course.
The US Dollar (USD) stages a modest recovery following the recent slump to its lowest level in over a week. Apart from this, a generally positive tone around the equity markets is seen undermining the safe-haven Swiss Franc (CHF) and turns out to be another factor lending some support to the USD/CHF pair. Any meaningful USD appreciation, however, seems elusive in the wake of bets for further policy easing by the Federal Reserve (Fed).
In fact, the markets are pricing in the possibility that the US central bank will lower borrowing costs twice by the end of this year. The bets were reaffirmed by the disappointing release of the US ISM Services PMI, which declined to 52.8 in January. This, to a larger extent, overshadowed the ADP report showing that private-sector employment increased by 183K in January compared to the previous month's upwardly revised reading of 176 K.
Apart from this, concerns about the escalating US-China trade war and the potential economic fallout from US President Donald Trump's trade tariffs could keep a lid on the market optimism. This, in turn, might hold back traders from placing aggressive bearish bets around the safe-haven CHF and cap the USD/CHF pair. Hence, it will be prudent to wait for strong follow-through buying before positioning for any further gains.
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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