USD/CHF trades with negative bias below 0.8000; focus remains on US CPI report
- USD/CHF ticks lower during the Asian session, though it lacks any strong follow-through selling.
- A positive risk tone and SNB Chief Schlegel's remarks undermine the CHF and support the major.
- The US CPI report will drive the USD later this Thursday and provide a fresh impetus to the pair.
The USD/CHF pair struggles to capitalize on its gains registered over the past two days and trades with a mild negative bias, below the 0.8000 psychological mark during the Asian session on Thursday. The downside, however, remains cushioned as traders opt to wait for the latest US consumer inflation figures.
The crucial US Consumer Price Index (CPI) is due for release later during the North American session and will play a key role in influencing market expectations about the possibility of a jumbo interest rate cut by the Federal Reserve (Fed) next week. This, in turn, will drive the US Dollar (USD) demand in the near-term and provide some meaningful impetus to the USD/CHF pair.
Heading into the key data risk, traders have been pricing in the possibility of a more aggressive policy easing by the US central bank and have almost fully priced in three rate cuts for the rest of the year. The bets were lifted by the cooler US Producer Price Index (PPI) released on Wednesday, which is seen weighing on the USD and acting as a headwind for the USD/CHF pair.
However, a generally positive risk tone, along with Swiss National Bank (SNB) Chairman Martin Schlegel's dovish remarks on Wednesday, could undermine the safe-haven Swiss Franc (CHF). In fact, Schlegel said that the central bank would not hesitate to cut rates again if conditions warrant, though the bar for returning to negative interest rates remains very high.
This, in turn, makes it prudent to wait for strong follow-through selling before confirming that the USD/CHF pair's recovery from the 0.7915 area, or the lowest level since July 23 touched earlier this week, has run out of steam. Bullish traders, on the other hand, need to wait for sustained strength and acceptance above the 0.8000 mark before positioning for further gains.
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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