USD/CHF gains ground to near 0.8000 on Fed-SNB policy divergence
- USD/CHF gains ground to around 0.7990 in Tuesday’s early European session.
- Traders have pushed back expectations for US rate cuts, supporting the US Dollar.
- Swiss inflation rose to a one-year high of 0.3% in March, driven by soaring energy costs linked to the Middle East conflict.
The USD/CHF pair gathers strength near 0.7990 during the early European trading hours on Tuesday. The Greenback edges higher against the Swiss Franc (CHF) on a widening monetary policy divergence between the US Federal Reserve (Fed) and the Swiss National Bank (SNB). The US Durable Goods Orders and ADP Employment reports will be released later on Tuesday.
Traders will closely monitor the developments surrounding US President Donald Trump’s deadline for Iran to make a peace deal. Trump said on Monday that the latest proposal for a US ceasefire with Iran is “not good enough.” He threatened to target Iran's power plants and bridges if the strategic waterway is not reopened, setting a precise deadline of Tuesday, 8 p.m. Eastern Time (00:00 GMT Wednesday).
Attention remains firmly on the Strait of Hormuz, a crucial route for Middle East oil flows, with the US president insisting any agreement must guarantee continued transit through the waterway.
Meanwhile, surging crude oil prices due to supply disruption prompt traders to reduce expectations of US interest rate cuts, lifting the US Dollar (USD). Cleveland Fed President Beth Hammack said on Monday that a rate hike would be appropriate if inflation persists above the 2% target.
On the Swiss front, Switzerland’s inflation rate jumped in March to the fastest pace in a year as the energy supply crunch caused by the war in the Middle East stoked the cost of heating oil. Hotter Swiss inflation has reduced pressure on the SNB to return to negative interest rates.
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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