Swiss Franc's recovery stalls despite broad-based US Dollar weakness
- USD/CHF holds above 0.8325, after a mild reversal from the 0.8350 area.
- A moderate pullback on US Treasury yields and the reversal in Oil prices is undermining support for the safe-haven US Dollar.
- Fed-SNB monetary policy divergence remains a significant hindrance to a strong CHF recovery.
The Swiss Franc (CHF) has trimmed some losses in a quiet market session on Tuesday, as a pullback on US Treasury yields and a mild reversal in Oil prices has undermined support for the safe-haven US Dollar (USD). The USD/CHF pair, however, stands above 0.8325 so far, which leaves the broader bullish structure intact.
US Treasury yields are pulling back from multi-decade highs, amid a moderate decline in Crude Oil prices. Brent Oil has retreated to $103.00 per barrel during the European trading session, about $2.5 below Monday’s highs, but still above $100, a level considered critical for global economic growth, which is keeping risk appetite subdued so far.
Earlier in the day, Cleveland Federal Reserve President Beth Hammack reiterated her hawkish message, calling for further monetary tightening in the coming months as, in her opinion, “inflation remains too high with the Fed having missed its 2% target for five and a half years.”
Fed's Hammack reiterates her call for higher interest rates
Hammack's words failed to support the US Dollar, with the market awaiting US Consumer Price Index (CPI) and Producer Price Index (PPI) releases later in the week for a better assessment of the Fed’s tightening calendar. Investors are pricing in an 80% chance that the US central bank will stand pat on rates at its October 28 and 29 meeting, but remain confident on a rate hike in December, according to the FedWatch Tool. Markets await September’s inflation data to confirm those hopes.
In Switzerland, the calendar is thin this week, and the monetary policy divergence between the Fed and the Swiss National Bank (SNB) is likely to keep the CHF on the defensive. The SNB’s benchmark interest rate is at 0% and is not expected to move in the near term as inflation in Switzerland remains at moderate levels.
Looking ahead, Strategists at UOB Group maintain a steady medium-term stance on USD/CHF, reiterating that the Dollar “has likely entered a range-trading phase between 0.8245 and 0.8365.”
SNB FAQs
The Swiss National Bank (SNB) is the country’s central bank. As an independent central bank, its mandate is to ensure price stability in the medium and long term. To ensure price stability, the SNB aims to maintain appropriate monetary conditions, which are determined by the interest rate level and exchange rates. For the SNB, price stability means a rise in the Swiss Consumer Price Index (CPI) of less than 2% per year.
The Swiss National Bank (SNB) Governing Board decides the appropriate level of its policy rate according to its price stability objective. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame excessive 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.
Yes. The Swiss National Bank (SNB) has regularly intervened in the foreign exchange market in order to avoid the Swiss Franc (CHF) appreciating too much against other currencies. A strong CHF hurts the competitiveness of the country’s powerful export sector. Between 2011 and 2015, the SNB implemented a peg to the Euro to limit the CHF advance against it. The bank intervenes in the market using its hefty foreign exchange reserves, usually by buying foreign currencies such as the US Dollar or the Euro. During episodes of high inflation, particularly due to energy, the SNB refrains from intervening markets as a strong CHF makes energy imports cheaper, cushioning the price shock for Swiss households and businesses.
The SNB meets once a quarter – in March, June, September and December – to conduct its monetary policy assessment. Each of these assessments results in a monetary policy decision and the publication of a medium-term inflation forecast.
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