USD/CHF consolidates above 0.7900, remains close to multi-year low set on Tuesday
- USD/CHF struggles to gain any meaningful traction on Wednesday amid mixed cues.
- A modest USD uptick and a positive risk tone act as a headwind for the currency pair.
- Fed rate cut bets cap gains for the USD and spot prices amid the SNB’s hawkish signal.
The USD/CHF pair consolidates in a narrow band above the 0.7900 mark during the Asian session on Wednesday and remains close to its lowest level since September 2011 touched the previous day.
The US Dollar (USD) ticks higher and looks to build on Tuesday's modest bounce from a three-and-a-half-year low. Apart from this, a positive risk tone is seen underpinning the Swiss Franc's (CHF) relative safe-haven status and holding back traders from placing aggressive bearish bets around the USD/CHF pair.
Any meaningful USD appreciation, however, seems elusive in the wake of the growing acceptance that the Federal Reserve (Fed) would resume its rate-cutting cycle in the near future. Moreover, concerns about the worsening US fiscal condition should cap the attempted USD recovery and the USD/CHF pair.
Meanwhile, the Swiss National Bank (SNB) hawkish signal disappointed investors expecting that rates might return to negative territory this year. This favors the CHF bulls, which, along with a bearish USD fundamental backdrop, suggests that the path of least resistance for the USD/CHF pair is to the downside.
Traders now look forward to the release of the US ADP report on private-sector employment for some impetus later during the North American session. The focus, however, will remain glued to the US Nonfarm Payrolls (NFP) report on Thursday, which will drive the USD and the USD/CHF pair in the near term.
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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