USD/CHF rises toward 0.8900 after rebounding from four-month lows
- USD/CHF has bounced back from its four-month low of 0.8820, which it hit on Thursday.
- The US Dollar continues to gain ground due to increased risk aversion.
- The Swiss Franc may struggle due to the expectations of the SNB reducing interest rates further.
USD/CHF gains ground for the second successive day, trading around 0.8880 during the European session on Friday. The USD/CHF pair has rebounded from a four-month low at 0.8820 recorded on Thursday. This upside of the pair can be attributed to the strengthening of the US Dollar amid increased risk aversion.
Additionally, The US Dollar is bolstered as US Treasury yields continue to improve. US Dollar Index (DXY), which measures the value of the US Dollar against the six other major currencies, trades around 104.30 with 2-year and 10-year yields on US Treasury bonds standing at 4.46% and 4.19%, respectively, at the time of writing.
However, the upside of the USD could be potentially constrained by soft labor data, which enhances market expectations for a Federal Reserve (Fed) rate cut in September. According to CME Group’s FedWatch Tool, markets now indicate a 93.5% probability of a 25-basis point rate cut at the September Fed meeting, up from 85.1% a week earlier.
US Initial Jobless Claims increased more than expected, data showed on Thursday, adding 243K new unemployment benefits seekers for the week ended July 12 compared to the expected 230K, and rising above the previous week’s revised 223K.
On the Swiss front, the expectation that the Swiss National Bank (SNB) might cut interest rates further could weigh on the Swiss Franc (CHF). In June, the SNB reduced its key interest rate by 25 basis points for the second consecutive meeting. This decision was driven by subdued inflationary pressures and the resilience of the CHF.
Kyle Chapman, FX markets analyst at Ballinger Group, stated, "I expect the SNB to follow up with a third cut next quarter, and there is potential for a fourth in December if there is still high conviction in the restrictive level of monetary policy."
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.