Swiss Franc edges lower as US Dollar gains offset lower yield impact
- USD/CHF inches higher as a stronger US Dollar holds firm, backed by caution before Wednesday's Fed rate decision.
- Markets expect a Fed rate pause at the October policy decision due on Wednesday.
- Swiss 10-year government bond yield fell to near 0.47% amid safe-haven flows.
USD/CHF inches higher after two days of gains, hovering around 0.8280 during Asian hours on Tuesday. The pair moves little as the US Dollar (USD) remains stronger, driven by market caution ahead of looming interest rate decisions by the US Federal Reserve (Fed) due on Wednesday.
Financial markets expect the Federal Reserve to keep interest rates unchanged at its upcoming October meeting before potentially hiking rates again in December. According to the CME FedWatch Tool, market pricing currently reflects an 89.5% probability of a rate pause at the October policy meeting, alongside an 82.3% chance of a rate increase in December.
Heather Long, chief economist at Navy Federal Credit Union, said that “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” “For consumers, it means really high borrowing costs for the foreseeable future.” However, “given that it’s right before an election,” Heather added, “they won’t hike in October.”
The upside of the USD/CHF pair is restrained as the Swiss Franc (CHF) gains strength as the yield on the Swiss 10-year government bond fell to near 0.47%, driven by safe-haven demand amid growing concerns over Europe's fiscal outlook.
Swiss National Bank (SNB) Meeting Minutes revealed that policymakers observed inflationary pressures with no signs of spillover effects into the broader economy, attributing the recent rise in inflation primarily to higher oil prices and the depreciation of the CHF.
USD/CHF rally seen stretching toward nearby resistance
Strategists at UOB Group note that USD/CHF has extended its recent surge, with the Dollar “rising sharply to a high of 0.8255” on Friday and pushing on to “0.8278 before settling at 0.8271 (+0.27%)” yesterday. They acknowledge that “conditions are overbought after the sharp rise over the past two days,” yet still see room for the move to continue, highlighting “scope for USD to test 0.8290,” while cautioning that “a sustained advance above this level is unlikely.” On the downside, UOB flags “support is at 0.8250,” marking the first line of defense for the pair after its rapid ascent.
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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