Swiss Franc struggles near lows as monetary policy divergence boosts US Dollar
- USD/CHF consolidates below monthly highs at 0.8200 after rallying nearly 1,2% so far in September.
- The US Dollar rallies across the board as investors ramp up bets on Fed monetary tightening.
- Low SNB interest rates are making the CHF the carry traders' favourite funding currency.
The Swiss Franc (CHF) consolidates losses against the US Dollar (USD) on Tuesday, with the USD/CHF trading just below one-and-a-half-month highs at the 0.8200 level. The monetary policy divergence between the US Federal Reserve (Fed) and the Swiss National Bank (SNB) is weighing down the Swissie, which has depreciated nearly 1.2% so far in September despite its traditional safe-haven appeal.
The combination of a strong US Nonfarm Payrolls (NFP) report in August and the hot US inflationary pressures seen last week have boosted market expectations that the Fed will hike interest rates on Wednesday. Futures markets are pricing a 92% chance of a quarter-point rate hike after their September 16 meeting, and another one before the end of the year, according to figures by the CME’s FedWatch Tool. This sentiment has been buoying the US Dollar across the board this week.
The SNB, on the contrary, is widely expected to leave interest rates on hold at the current 0% level for the rest of the year and most likely well into 2027. Consumer inflation accelerated to a 0.8% year-over-year rate in August, up from 0.4% in July, which prompted the SNB President,Martin Schlegel to affirm that the “wind has changed on interest rates,” but markets, so far, have discarded an imminent monetary policy change.
Carry traders set their gaze on the Swissie
Against this backdrop, the low SNB interest rates set the Swiss Franc as one of the favourite funding currencies for carry trade, especially after the Bank of Japan’s (BoJ) hawkish repricing triggered a massive unwinding of Yen short positions.
This practice consists of borrowing a low-yielding currency to buy a higher-yielding one, pocketing the differential, and is having its best run in years, according to Citi data released by Reuters.
Rabobank strategists, however, warn that "the CHF could see a surge in long positions if market anxieties rise,” underscoring the Swiss Franc’s enduring safe haven appeal. "Given that next year will bring the French Presidential election and the prospect of a victory by the far-right, this may be a risk that many market participants may be wary about,” and one that could still trigger renewed demand for the Franc, says Rabobank in a note.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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