Swiss Franc holds below 0.8100 US Dollar with US-Iran negotiations deadlocked
- USD/CHF consolidates above 0.8100 after bouncing from Friday's lows near 0.8050.
- The US Dollar is drawing support from the uncertain US-Iran peace process and hawkish Fed speak.
- FX volatility remains below average, with investors awaiting Wednesday's US CPI report.
The Swiss Franc trades practically flat against the US Dollar (USD) on Tuesday, consolidating halfway through last week’s trading range. The USD/CHF pair bounced up from Friday’s lows just above 0.8050 on Monday, amid growing concerns about the fate of the US-Iran peace negotiations and hawkish comments from Federal Reserve (Fed) officials, with FX volatility subdued ahead of the US Consumer Price Index (CPI) release, due on Wednesday.
In the absence of key macroeconomic releases on Tuesday, developments in the Middle East are driving markets with growing uncertainty about the peace plan pushing Oil prices higher and curbing investors’ appetite for risk. US and Iran fail to find a formula to reopen the Strait of Hormuz, entangled in reciprocal requests for war damage compensation, and drifting away expectations of a swift resolution of the conflict.
Beyond that, Cleveland Federal Reserve (Fed) President Beth Hammack affirmed on Monday that the central bank might have to hike interest rates more than once to bring inflation to target. This has fuelled hopes of some monetary tightening in September, offsetting the negative impact from Friday's US Nonfarm Payrolls, and providing some support to the US Dollar.
OCBC: USD seen rangebound as Fed hike bar stays high
Regarding US consumer inflation, strategists at OCBC argue that Wednesday's report would need to deliver a clear upside surprise to meaningfully shift the policy narrative. In their view, "core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike."
Against this backdrop, they expect that "a rangebound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets." Nevertheless, they warn that "Iran's firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited."
The Swissie, however, is unlikely to perform any significant recovery, according to OCBC experts, "as carry trade funding demand grows and the SNB appears comfortable with a weaker currency.” With “inflation subdued and policy rates likely anchored at zero, CHF weakness could persist into year-end,” said OCBC analysts in a note.
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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