Swiss Franc gains momentum ahead of inflation data
- Swiss Franc gains support as annual CPI is projected to rise to 1.3%.
- Mixed economic signals in Switzerland emerge, with slowing retail sales offset by strong manufacturing expansion.
- USD weakens against CHF amid US election uncertainties and upcoming Nonfarm Payroll data.
USD/CHF remains flat after losing its daily gains, trading around 0.8180 during Asian hours on Tuesday. The pair faces challenges as the Swiss Franc (CHF) receives support ahead of the domestic Consumer Price Index (CPI) data release. Swiss monthly inflation is expected to remain at 0% in October, while the annual CPI is seen to increase 1.3% from the previous 1.0%.
Monday data showed that Swiss Real Retail Sales rose by 1.6% year-on-year in September, slowing from an upwardly revised 3.9% increase in August and missing forecasts for a 3% gain. This was the smallest increase since March. However, the SVME Manufacturing Purchasing Managers Index (PMI) rose to 56.7 in October from 55.3 in September, exceeding market expectations of 55.3 and marking the eighth consecutive month of expansion.
The USD/CHF pair lost its daily gains as the US Dollar (USD) struggles ahead of the US midterm elections. Political pressure on US President Donald Trump and the Republican Party has mounted due to elevated energy prices linked to ongoing conflicts with Iran. Meanwhile, prediction markets currently reflect a 74% probability of the Democratic Party gaining control of the US Senate, highlighting the elevated political stakes surrounding the vote.
Meanwhile, market participants are keeping a close watch on the upcoming US jobs report scheduled for release later this week. The employment data is expected to offer fresh insights into labor market health and help shape expectations for future monetary policy decisions. The Federal Reserve has maintained a hawkish stance, with the CME FedWatch Tool currently pricing in roughly a 73% chance of a rate hike in December following a policy pause in October.
Dollar outlook tied to shifting US political backing
Commerzbank’s Norman Liebke cautions that the US midterm outcome will still matter for the Dollar in the near term, even if it is only one of several drivers. He argues that “the election result is unlikely to be entirely irrelevant for the dollar,” warning that if the Republicans were to lose their majorities in both chambers, “the dollar could come under greater pressure, as the Trump administration would have less political backing overall.” Liebke adds that a more limited shift in Washington would also carry consequences: “If only the House of Representatives changes hands, the dollar would likely face some headwinds as well, albeit to a lesser extent.”
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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