Swiss Franc advances as USD loses latest gains despite increased risk aversion
- USD/CHF depreciates as the US Dollar loses daily gains, despite heightened risk aversion and rising Fed hike expectations.
- Market sentiment remains cautious following drone attacks on both the UAE and Saudi Arabia.
- Swiss economy grew 0.5% quarter-on-quarter in the three months to March, up from 0.2% the previous period.
USD/CHF halts its five-day winning streak, trading around 0.7860 during the early European hours on Monday. The currency pair depreciated as the US Dollar (USD) surrendered its daily gains, despite a backdrop of heightened risk aversion and rising US interest rate hike expectations.
Market sentiment remains deeply cautious following recent drone attacks on both the United Arab Emirates (UAE) and Saudi Arabia, alongside escalating geopolitical tensions between the United States and Iran. UAE officials are currently investigating a drone strike on the Barakah nuclear power plant and have asserted their full right to respond to what they termed a terrorist attack. Concurrently, Saudi Arabia intercepted three drones entering its airspace from Iraq and warned via Reuters that it would take all necessary operational measures to defend its sovereignty and security.
Additionally, US President Donald Trump plans to meet with top national security advisers to discuss military options regarding Iran, further deepening the risk of a wider regional conflict. While Trump has warned Tehran that time is running out to reach a new agreement, Iranian media reports indicate that the two sides remain deeply divided, claiming the US has offered no tangible concessions during their negotiations.
Amid this instability, market bets regarding the Federal Reserve's (Fed) monetary policy path continue to shift toward potential rate hikes. According to the CME FedWatch tool, markets are now pricing in a 44.6% probability that the US central bank could raise interest rates by at least 25 basis points (bps) at its December meeting.
Meanwhile, flash estimates showed that Switzerland’s economy expanded by 0.5% quarter-on-quarter (QoQ) in the three months to March, accelerating from the 0.2% growth recorded in the previous period. This marked the strongest quarterly performance for the country in a year, suggesting that the Swiss economy continues to recover despite a surge in energy prices and a stronger Swiss Franc (CHF) following the outbreak of the Iran war.
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.