EUR/CHF extends gains as traders unwind Swiss Franc positions
- EUR/CHF extends gains for an eighth straight day, hovering near seven-week highs.
- Swiss Franc weakens as traders unwind long-CHF positioning after a period of excessive strength.
- Monetary policy divergence favours the Euro as ECB holds steady while SNB keeps rates at 0%
The Euro (EUR) continues to advance against the Swiss Franc (CHF) on Tuesday, with EUR/CHF extending gains for an eighth straight session after bottoming out near 0.9179, its lowest level since 2015. At the time of writing, the pair is trading around 0.9344, hovering near seven-week highs as the Franc remains under sustained pressure.
The latest advance appears driven primarily by technical buying and short-covering rather than a meaningful deterioration in Swiss fundamentals. Traders are scaling back long-Franc positioning following an extended stretch of appreciation, helping the Euro regain ground despite the lack of strong Eurozone catalysts.
A mildly improved tone in broader risk sentiment is also weighing on the Franc, tempering safe-haven demand. Signs of early progress in US-brokered efforts to refine a Russia-Ukraine peace framework have contributed to reduced defensive positioning, even if the geopolitical outlook remains far from resolved.
On the data front, Germany’s revised third-quarter Gross Domestic Product (GDP) figures released earlier in the day did little to shift sentiment, with quarterly growth unchanged at 0.0% and the annual rate steady at 0.3%.
From a monetary policy perspective, the divergence in expectations continues to lean in favour of the Euro. The European Central Bank (ECB) has signalled that it is nearing the end of its easing cycle after holding rates at its past three meetings, following four reductions earlier in the year. Markets broadly expect the ECB to keep policy unchanged at its December decision as inflation sits close to target and officials adopt a more neutral tone.
In contrast, the Swiss National Bank (SNB) remains more dovish, with its policy rate sitting at 0% after two cuts this year and policymakers maintaining a readiness to act if currency conditions tighten or price pressure eases further. However, the SNB has also indicated that inflation is likely to rise slightly in the coming quarters, suggesting no urgency to deliver further easing.
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.
Chairman Martin Schlegel recently remarked that “our monetary policy is currently expansionary, which means it supports inflation,” reinforcing the view that policymakers are comfortable keeping rates at zero for now.
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