USD/CHF holds below 0.8650 amid broad US Dollar weakness
|- USD/CHF loses ground near 0.8620 in Tuesday’s early Asian session.
- The expectation of three quarter-point rate cuts this year weighs on the USD.
- Easing geopolitical risks in the Middle East could cap the pair’s downside.
The USD/CHF pair trades in negative territory for the third consecutive day around 0.8620 on Tuesday during the early European trading hours. The weaker US Dollar (USD) amid rate-cut expectation by the Federal Reserve (Fed) weighs on the pair. The Fed Chair Jerome Powell's speech on Friday will be a closely watched event and might offer some hints about the path forward for US interest rates.
The Fed is predicted to deliver 25 basis points (bps) at each of the remaining three meetings of 2024, according to a slim majority of economists polled by Reuters. A discouraging July US employment report fuelled traders to place more bets on deep rate cuts, which exerts some selling pressure on the USD.
The USD Index (DXY), which measures the value of the USD against the other six major currencies, drops to the multi-day lows below the 102.00 support level. On Monday, Minneapolis Fed President Neel Kashkari said that he would be open to cutting US interest rates in September due to the rising possibility that the labor market weakens too much. The dovish stance from the US Fed is likely to cap the upside of the pair in the near term.
On the other hand, easing geopolitical risks in the Middle East could drag the Swiss Franc (CHF) lower and create a tailwind for the pair. The United States said that Israeli Prime Minister Benjamin Netanyahu has accepted a bridging proposal aimed at resolving differences between Israel and Hamas. A de-escalation of tensions in the Middle East would most likely result in the geopolitical risk premium disappearing rapidly.
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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