Swiss Franc gains despite stable US Dollar amid ongoing inflation risks
- Surging US Dollar and multi-decade high Treasury yields may add upward momentum to the USD/CHF pair.
- Swiss Franc weakness is likely as economists expect the SNB to maintain its policy rate at 0%.
- September inflation reached 1.0%, hitting the midpoint of the SNB target range and easing hike pressure.
USD/CHF halts its three-day winning streak, trading around 0.8330 during Asian hours on Thursday. However, the downside of the pair could be limited as the US Dollar (USD) gains solid backing from the Federal Open Market Committee's (FOMC) hawkish stance amid ongoing inflation risks.
Minutes from the Federal Reserve’s (Fed) September meeting revealed unanimous support among all 19 policymakers for the September rate hike, with a majority indicating another increase would likely be appropriate by year-end. Although markets widely expect the central bank to keep interest rates on hold at its October meeting, CME's FedWatch tool shows traders are still pricing in a 78.3% probability of a December rate increase.
Further supporting the Greenback, US Treasury bond yields have rebounded back toward multi-decade highs not seen since 2002, with the 10-year and 30-year Treasury notes trading around 5.31% and 5.70%, respectively. Investors are now turning their focus to upcoming remarks from key Fed officials, including Christopher Waller and Alberto Musalem, for additional guidance on the interest rate trajectory.
Meanwhile, the USD/CHF pair could see further upside as the Swiss Franc contends with monetary policy headwinds. Economists generally expect the Swiss National Bank (SNB) to hold its policy rate at 0% over the coming years, even as money markets attempt to price in up to three rate hikes next year.
While Swiss inflation accelerated to 1.0% in September due to elevated energy costs, reaching the midpoint of the SNB’s target band, it remains well within the central bank's price-stability threshold, giving policymakers little immediate pressure to tighten policy.
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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