USD/CHF extends downside below 0.8350 on soft inflation reports
- USD/CHF trades in negative territory near 0.8330 in Friday’s early European session.
- Soft inflation reports drag the US Dollar lower.
- SNB's dovish stance might cap the CHF’s upside.
The USD/CHF pair extends the decline to around 0.8340 during the early European session on Friday. Soft US producer prices and consumer inflation weigh on the US Dollar (USD). Later on Friday, investors will focus on the release of the Swiss Producer and Import Prices report for April.
The US Producer Price Index (PPI) rose 2.4% YoY in April, following the 2.7% increase in March, according to the Bureau of Labor Statistics on Thursday. This figure came in below the market expectation of 2.5%. Earlier this week, data showed that the US CPI increased by 2.3% YoY in April, compared to a rise of 2.4% in March. This reading came in below the market expectation of 2.4%.
Markets are now pricing in nearly a 75.4% chance for the first cut of at least 25 basis points (bps) at the central bank's September meeting, according to LSEG data. Some analysts believe the Fed officials could wait until December.
Fed Chair Jerome Powell said on Thursday that the US central bank officials feel they need to reconsider the key elements around jobs and inflation in their approach to monetary policy, given the inflation experience of the last few years. Meanwhile, Fed Governor Michael Barr said the economy is on solid footing with inflation moving towards the central bank's 2% target, but trade policies have raised uncertainty about the outlook.
The economic uncertainty could weigh on the sentiment, which benefits the Swiss Franc's (CHF) relative safe-haven status and acts as a headwind for the USD/CHF pair. However, the dovish stance of the Swiss National Bank (SNB) might cap the CHF’s upside. SNB Chairman Martin Schlegel emphasized that the Swiss central bank was ready to slash rates below zero if inflation keeps undershooting its target.
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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