USD/CHF holds below 0.8450 as investors bet on 50 bps rate cut
- USD/CHF edges lower to near 0.8440 in Tuesday’s Asian session.
- The US Dollar remains under pressure amid dovish Fed.
- Economists see the SNB cut rates by another quarter-point cut on September 26.
The USD/CHF pair trades in negative territory for the fourth consecutive day around 0.8440 during the early European session on Tuesday. The rising expectation that the US Federal Reserve (Fed) will cut a larger interest rate at its upcoming monetary policy meeting on Wednesday weighs on the US Dollar (USD). Ahead of the key event, the US Retail Sales for August are due on Tuesday.
The USD traded near the lowest levels of the year in the previous session as markets are betting on an outsized rate cut by the Fed. Fed Chair Jerome Powel said last month at the Jackson Hole that inflation had come under control just enough for the Fed to finally feel comfortable dialing back policy.
The Federal Reserve is widely anticipated to cut the interest rate at its September on Wednesday, the first time in four years. Investors will also take more cues from interest rate projections, known as the "dot plot”. The expectation of aggressive rate cuts might continue to undermine the Greenback in the near term.
On the Swiss front, economists forecast the Swiss National Bank (SNB) will lower rates by another quarter-point cut on September 26, Markets are now pricing in a roughly one-in-three chance, up from zero just a month ago, per Bloomberg. Meanwhile, the ongoing geopolitical tensions in the Middle East could boost the safe-haven demand, benefitting the Swiss Franc (CHF). Israeli Prime Minister Benjamin Netanyahu said on Sunday that Yemen's Houthis will pay a "heavy price" after a missile fired by the group landed in central Israel, according to the BBC.
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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