USD/CHF stays below 0.8500, traders adopt caution due to looming US inflation
- USD/CHF loses ground as market caution emerges due to looming US CPI data.
- The improved US Treasury yields provide support to limit the downside of the US Dollar.
- The latest Swiss Foreign Currency Reserves indicates continuing intervention by the Swiss National Bank to support the Swiss Franc.
USD/CHF inches lower to near 0.8480 during the European hours on Tuesday. This downside could be attributed to the US Dollar (USD) paring its intraday gains, possibly driven by improved risk sentiment. However, the improved US Treasury yields provide support to limit the downside of the Greenback.
The US Dollar Index (DXY), which measures the value of the US Dollar against six other major currencies, holds minor gains for the third successive day, trading around 101.70 with 2-year and 10-year yields on US Treasury bonds standing at 3.69% and 3.72%, respectively, at the time of writing.
Additionally, the US Dollar received support as the recent US labor market report raised uncertainty over the likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 29.0%, down from 30.0% a week ago.
In Switzerland, traders are expected to closely monitor any speeches from Swiss National Bank (SNB) members this week, as there are no major economic releases scheduled. Recently, Swiss inflation fell to a five-month low, increasing speculation about the possibility of another rate cut by the SNB in the near future.
Last week, the Swiss National Bank's (SNB) Foreign Currency Reserves fell to CHF 694 billion in August, down from CHF 704 billion in July. This marks the fourth consecutive decline, suggesting continued intervention by the Swiss National Bank (SNB) in currency markets to support the Swiss Franc (CHF).
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.