USD/CHF hits fresh four-week lows at 0.7900 on risk-averse markets
- The US Dollar hits fresh four-week lows against the Swissie, at 0.7900.
- The Swiss Franc appreciates across the board on Friday, favoured by risk-averse markets.
- Dwindling hopes of a Fed cut in December are failing to support the US Dollar.
The US Dollar remains vulnerable against a firmer Swiss Franc, which is drawing support from a cautious market mood to appreciate against its main peers on Friday. The pair is trading at 0.7920 at the time of writing, after having reached fresh four-week lows at 0.7900, and is on track for a nearly 1.5% weekly sell-off.
The safe-haven Swiss Franc is outperforming on Friday, favoured by risk-off markets, with European equity markets in the red, following significant declines on Wall Street and in Asia. In the economic calendar, the weak Chinese housing prices and a deeper-than-expected slowdown in Industrial Production have failed to lift sentiment.
The Dollar remains vulnerable awaiting US official data
Regarding the US Dollar, investors remain wary of placing large directional bets, awaiting the release of a backlog of data next week, as US official agencies resume their activity. Private reports released during the shutdown have added to evidence of a deteriorating labour market, and the investors expect macroeconomic data to confirm that view, adding pressure on the Fed to cut rates further in December.
Most Federal Reserve speakers, however, have conveyed a hawkish message this week. On Thursday, Fed’s Mussalen and Hammack reiterated their concerns about inflation, and called for steady rates in December, and the Minneapolis Fed President Neel Kashkari affirmed that he does not have a strong inclination for an interest rate cut.
Traders have pushed back hopes of a monetary easing in December. Chances of a 25 basis points rate cut next month have dropped to 50% from 64% last week and above 90% before October’s Fed meeting, according to the CME Fed Watch Tool. This, however, is failing to provide any significant support to the US Dollar.
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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