USD/CHF drifts higher above 0.8000 as US ISM Manufacturing PMI looms
- USD/CHF trades in positive territory near 0.8010 in Tuesday’s early European session.
- The pair gains ground amid a firmer US Dollar, but the Fed’s dovish tone might cap its upside.
- The Swiss Real Retail Sales and US August ISM Manufacturing PMI will be the highlights later on Tuesday.
The USD/CHF pair edges higher to around 0.8015 during the early European session on Tuesday, bolstered by a modest rebound in US Dollar (USD). Nonetheless, potential upside for the pair might be limited amid rising bets of the US Federal Reserve (Fed) rate cut. Traders will take more cues from the Swiss Real Retail Sales and US ISM Manufacturing Purchasing Managers Index (PMI) for August later on Tuesday.
The Fed is expected to deliver a rate cut in the September meeting after maintaining its rates for nine months. Fed Chair Jerome Powell signalled a possible interest rate cut at the US central bank's meeting in September, saying that risks to the job market were rising.
Meanwhile, Fed Governor Christopher Waller noted that he would support a rate reduction in the September meeting and further reductions over the next three to six months to prevent the labor market from collapsing. Traders are currently pricing in a 90% odds of a 25-basis-point Fed rate cut on September 17, according to the CME FedWatch tool.
On the Swiss front, ongoing geopolitical tensions between Russia and Ukraine could boost safe-haven flows and support the Swiss Franc (CHF). Russian drone attacks on power facilities in northern and southern Ukraine on Sunday left nearly 60,000 customers without electricity, per the Guardian. Ukrainian President Volodymyr Zelenskyy vowed to retaliate by ordering more strikes deep inside Russia.
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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