Swiss Franc weakens as July inflation cools to four-month lows
- Swiss CPI drops to 0.4%, signaling minimal energy cost pass-through.
- SNB Monetary policy projected to remain unchanged through the end of the year.
- Markets price in a 65% chance of a September 25-bps rate increase.
USD/CHF moves little after two days of gains, trading around 0.8100 during the Asian hours on Tuesday. The currency pair may appreciate further as the Swiss Franc (CHF) faces headwinds from easing domestic inflation.
Swiss CPI slowed to 0.4% in July, down from 0.5% in the previous month to hit its lowest level in four months. This slowdown underscores a limited pass-through from higher geopolitical energy prices, contrasting with the Swiss National Bank's (SNB) expectations of a modest near-term inflation pickup following its decision to hold policy rates at 0%.
Franc under pressure as SNB keeps rates at zero
Strategists at Brown Brothers Harriman highlight that "Swiss July CPI stays muted," underscoring the absence of inflationary pressure in the economy. In their view, the "bottom line" is that the SNB "has plenty of room to keep rates at 0.00% for some time, which is an ongoing drag for CHF." They note that against this backdrop of subdued price dynamics and a firmly anchored policy rate, "CHF is the worst performing G10 currency so far this quarter."
Looking ahead, the SNB is anticipated to keep borrowing costs unchanged through year-end; additional rate cuts remain a contingency plan rather than a base case, particularly given the absence of severe stress within the Swiss banking sector.
Meanwhile, price action in the pair remains muted as the US Dollar (USD) stabilizes amid ongoing diplomatic uncertainty. Tensions rose after US President Donald Trump characterized his offer for discussions with Iran as a "last chance," following his decision to call off a major military strike. Iranian leadership swiftly dismissed the proposal, with General Mohsen Rezaei, an advisor to Iran's Supreme Leader, rejecting the conditions and asserting that Iran will not permit a second corridor in the Strait of Hormuz.
Meanwhile, market participants are continuing to recalibrate their monetary policy expectations following the Fed's decision to hold interest rates steady in July. According to the CME FedWatch tool, traders are currently pricing in roughly a 65% probability of a 25-basis-point rate hike at the Federal Reserve's upcoming September meeting.
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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