Swiss Franc weakens as US Dollar holds gains on oil-driven inflation
- USD/CHF rises as the US Dollar gains amid rising oil prices, heightening global inflation risks.
- FedWatch Tool suggests that markets price an 83.9% chance of a rate pause next week.
- Switzerland's Trade Surplus shrank to CHF 1.31 billion in September as imports surged 24.9%.
USD/CHF gains ground after posting losses the previous day, trading around 0.8260 during Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) receives support safe-haven demand amid rising oil prices heighten global inflation concerns.
Oil prices rise as traders carefully evaluate mixed signals regarding diplomatic engagements between the United States (US) and Iran. Although negotiations remain active, market sentiment faced headwinds following high-level meetings in Tehran, where Pakistan’s army chief, Field Marshal Asim Munir, met with senior Iranian diplomatic and military leaders to discuss bilateral ties and the status of talks with Washington. A diplomat involved in the discussions clarified that while conflict resolution efforts are ongoing, reports of an imminent final agreement are premature.
Financial markets are closely gauging the Federal Reserve's (Fed) next moves. According to the CME FedWatch Tool, traders currently price in an 83.9% probability that the Fed will keep interest rates on hold next week, alongside a 90% chance of a rate hike in December. However, Fed Chair Kevin Warsh maintained a neutral stance, emphasizing that he does not "prejudge" interest rate decisions and leaving markets without a definitive signal on whether the central bank will raise or hold rates steady at its upcoming October policy meeting.
According to data released Tuesday by the Federal Customs Administration of Switzerland, the country's Trade Surplus narrowed significantly to CHF 1.31 billion in September, down from CHF 4.2 billion the previous month. This represents the narrowest trade surplus since November 2022, driven by a 24.9% month-on-month surge in imports, a more than one-year high. Meanwhile, exports saw a modest gain of 1.5% MoM.
USD/CHF downside bias intact as UOB keeps focus on 0.8200 while 0.8300 caps
Strategists at UOB Group note that the bearish bias in USD/CHF has been steadily reinforced over recent sessions. They recall that last Friday, 16 Oct, with spot around 0.8280, they had highlighted that “downward momentum is building and if USD closes below 0.8245, it could decline toward 0.8225.” The pair subsequently fell to a low of 0.8215, prompting an updated call yesterday, 19 Oct, when spot was near 0.8240, that USD “could decline further to 0.8200.” UOB stresses that they “will continue to hold the same view as long as USD holds below 0.8300,” with no change to the “strong resistance” level that continues to cap the topside.
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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