USD/CHF falls toward 0.8850 as traders expect a Fed rate cut in September
|- USD/CHF depreciates as risk sentiment improves due to the dovish Fed.
- US President Joe Biden announced that he will not seek re-election against former President Donald Trump.
- The Swiss Franc could limit its upside due to the rising odds of the SNB reducing rates further.
USD/CHF loses ground after two days of gains, trading around 0.8880 during the European hours on Monday. The dovish outlook on the Federal Reserve's policy is exerting pressure on the US Dollar (USD), weakening the USD/CHF pair. According to CME Group’s FedWatch Tool, the likelihood of a 25-basis point rate cut at the September Fed meeting has risen to 91.7%, up from 90.3% a week ago.
Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail. Williams noted, "My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic," according to Bloomberg.
US President Joe Biden abandoned his re-election bid on Sunday under growing pressure from his fellow Democrats and endorsed Vice President Kamala Harris as the party's candidate to face Republican Donald Trump in the November election, according to Reuters.
Traders await the release of Global Purchasing Managers Index (PMI) and Gross Domestic Product (GDP) data later this week to gain fresh insights into the economic conditions of the United States (US).
On CHF’s side, the expectation that the Swiss National Bank (SNB) might cut interest rates further could weigh on the Swiss Franc (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.
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