- USD/CHF loses traction around 0.8590 in Thursday’s early European session, down 0.30% on the day.
- The US Fed is expected to cut rates more aggressively beginning in September.
- Strong safe-haven demand benefits the Swiss Franc against the Greenback.
The USD/CHF pair drifts lower to near 0.8590 during the early European session on Thursday. The Swiss Franc (CHF) gains traction from the unwinding of carry trades and escalating geopolitical tensions in the Middle East. Investors await the weekly US Initial Jobless Claims on Thursday for fresh impetus.
Investors have fully expected the US Federal Reserve (Fed) to start easing its monetary policy in September, with 50 basis points (bps) cuts in both September and November, and another quarter-point cut in December. Wells Fargo analysts are now projecting two 50 bps rate cuts at the FOMC meetings in September and November. More aggressive rate cut expectations from the Fed are triggered by the weaker-than-expected US July employment data last week, which raised the fears of a looming US recession. This, in turn, exerts some selling pressure on the Greenback broadly.
The Swiss Franc has surged almost 4% since mid-July amid a global unwinding of carry trades and safe-haven flows. Iran and its proxies are preparing for a potential retaliation against Israel. The latest intelligence noted that any response may be delayed until Thursday or Friday, according to CNN late Wednesday.
The Swiss National Bank (SNB) has cut interest rates twice this year and hinted at reducing more rates next month. UBS economist Maxime Botteron said at a time when the SNB is cutting interest rates, the Franc’s appreciation over the last few days could prompt foreign currency purchases by the bank.
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.
