USD/CHF gathers strength above 0.7850 as Fed rate decision looms
- USD/CHF gains traction around 0.7865 in Tuesday’s early European session.
- Fed interest rate decision will take center stage on Wednesday, with no change in rate expected.
- SNB’s Schlegel reaffirmed that the central bank is open to policy adjustments and FX interventions to curb excessive Swiss Franc strength.
The USD/CHF pair gathers strength near 0.7865 during the early European session on Tuesday. The US Dollar (USD) edges higher against the Swiss Franc (CHF) due to the stalled US-Iran ceasefire and the closure of the Strait of Hormuz. Traders brace for the US Federal Reserve (Fed) interest rate decision later on Wednesday.
Plans for a second round of peace talks between the US and Iran stalled again after US President Donald Trump had cancelled plans to send a team to Pakistan for negotiations with their Iranian counterparts.
On Monday, Iran offered to end its closure of the Strait of Hormuz if the US lifts its blockade on the country and ends the war in a proposal that would postpone discussions on the Islamic Republic’s nuclear program. White House press secretary Karoline Leavitt said that it remains unclear if Trump will entertain the offer to end the two-month-old war, as his bottom-line demands remain the same.
The US central bank is likely to keep the federal funds rate between 3.50% and 3.75% on Wednesday. This may be Jerome Powell's final meeting as Fed Chair before his term expires on May 15.
The Swiss National Bank (SNB) kept the policy rate at 0%. It aims to maintain this level to make the CHF less attractive to foreign investors. SNB Chairman Martin Schlegel reaffirmed at the April meeting that the bank is highly willing to intervene in foreign exchange (FX) markets by buying foreign currencies to weaken the CHF and protect price stability. He added that the current policy remains expansionary to support economic activity amidst "profound uncertainty."
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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