Swiss Franc drops to fresh 16-month lows as CPI data supports SNB’s dovishness

• USD/CHF rallies to fresh 16-month highs above 0.8380, poised to complete a six-week rally.
• Swiss inflation remains at moderate levels, which allows the SNB to keep low interest rates for a longer time.
• The US Dollar remains buoyed across the board as US yields hit fresh multi-decade highs.

The Swiss Franc (CHF) extends losses against a firm US Dollar (USD) on Thursday, as Swiss inflation data allows the Swiss National Bank (SNB) to keep interest rates lower for longer, while the Greenback remains buoyed by higher US Treasury yields. The USD/CHF pair hit a fresh 16-month high above 0.8380 and is on track to complete a six-week rally.

Swiss Consumer Price Index (CPI) data released on Thursday revealed that inflation accelerated to a 1% year-over-year (Y-o-Y) pace in September from 0.8% in August, although the monthly CPI eased to 0%, following 0.4% growth in the previous month. All in all, data in line with market expectations and nowhere close to pressuring the SNB to alter its accommodative monetary policy.

Retail Sales, on the other hand, accelerated to a 3.2% Y-o-Y pace in August, from 2.6% in July, against market expectations of a moderate slowdown to 2.2%. These figures, however, failed to offset the negative impact of the soft inflation data.

US Treasury yields underpin demand for the US Dollar

The US Dollar remains bid against its main peers, fuelled by long-term US Treasury yields, as the uncertainty in the Middle East conflict, which enters its seventh month this week, keeps boosting energy prices. The yield for the US 10-year note reached levels above 5.30% on Wednesday, and the 30-year yield hit 5.65, both at 24-year highs,

US inflation data, on the other hand, cooled market expectations of another Federal Reserve (Fed) rate hike in October, although it failed to dent the US Dollar’s strength. Figures released by the US Bureau of Economic Analysis (BEA) showed that the Personal Consumption Expenditures (PCE) Price Index grew less than expected in August, while July’s reading was revised lower.

Societe Generale’s Jan Groen argues that while recent inflation revisions were "modestly favorable (...) underlying inflation remains too elevated to provide the Fed with clear comfort.” Against this backdrop, Groen judges that “a pause in October remains possible, but an October hike remains on the table pending September CPI and PPI data.”