Swiss Franc gains as US Dollar weakens on Fed uncertainty
- USD/CHF depreciates as a Reuters poll indicates that the Fed will hold interest rates steady through year-end.
- Strong US jobs data has traders pricing in over a 60% chance of a rate hike.
- Safe-haven demand and tighter monetary expectations strengthen the Swiss Franc.
USD/CHF loses ground after registering gains in the previous day, trading around 0.8090 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) falls following a Reuters poll, in which the majority of economists said the Federal Reserve (Fed) will likely hold its interest rate steady at its September 15-16 meeting and for the rest of this year, once again defying market expectations for a series of hikes.
Economic data have mostly come in strong in recent weeks, and several economists noted that the August Consumer Price Index data will be crucial for solidifying their outlook on future interest rates.
Market participants are closely watching the upcoming US Producer Price Index data due to be released on Thursday and Consumer Price Index data on Friday, as these inflation reports could provide vital hints regarding the Federal Reserve's (Fed) monetary policy outlook ahead of its meeting next week.
Following recent stronger US jobs data, traders have increased their bets on an interest rate hike, with the CME FedWatch Tool pricing in over 60% odds for a rate increase at the central bank's upcoming policy meeting.
The USD/CHF pair depreciates as the Swiss Franc (CHF) receives strong support from the rising prospect of tighter monetary policy and higher inflation from major central banks, alongside continued safe-haven demand.
Although Swiss inflation doubled in August to 0.8%, the impact of higher energy prices is expected to be temporary, with electricity prices set to fall by around 4% from next year. Meanwhile, quarterly economic growth was confirmed at a five-year high of 1.5%. On the monetary policy front, a Swiss Bankers Association survey showed that all bankers expect the Swiss National Bank to keep its policy rate at 0% by the end of the year.
USD/CHF seen confined to recent range
Strategists at UOB Group maintain a neutral medium-term stance on USD/CHF, reiterating that they “continue to hold the same view as yesterday (07 Sep, spot at 0.8100).” For now, they “expect USD to trade in a range between 0.8055 and 0.8155,” a configuration that aligns with their broader assessment of largely directionless price action and a preference for consolidation over the next one to three weeks.
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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