USD/CHF remains below 0.8900 due to the dovish mood surrounding the Fed
|- USD/CHF depreciates as traders expect the Fed to reduce rates in September.
- NBC News projected that Vice President Kamala Harris had secured endorsements from a majority of the Democratic Party’s delegates.
- The Swiss Franc may limit its upside as the SNB could deduct interest rates further.
USD/CHF halts its three-day winning streak, trading around 0.8890 during the Asian session on Tuesday. The US Dollar (USD) faces pressure as expectations rise for a Federal Reserve (Fed) rate cut in September. Last week, Fed Chair Jerome Powell noted that the three US inflation readings this year "add somewhat to confidence" that inflation is on track to meet the Fed’s target sustainably, implying that interest rate cuts might be approaching.
Additionally, Federal Reserve Bank of New York President John Williams remarked on Friday that the long-term trends leading to lower neutral interest rates before the pandemic are still in effect. Williams stated, "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," as reported by Bloomberg.
On Monday, Democrats rallied behind Vice President Kamala Harris as the leading candidate for the presidential nomination. NBC News projected that Harris had secured endorsements from a majority of the Democratic party’s pledged convention delegates. The threshold for securing the nomination is 1,976 delegates, and NBC estimates that Harris has received the support of 1,992 delegates, either through spoken or written endorsements.
On the CHF front, traders anticipate that the Swiss National Bank (SNB) might further reduce interest rates in September, which could exert downward pressure on the Swiss Franc (CHF). This potential rate cut is driven by subdued inflationary pressures and the resilience of the CHF.
Kyle Chapman, FX markets analyst at Ballinger Group, commented, "I expect the SNB to implement a third rate cut next quarter, with a potential fourth cut in December if there remains strong confidence in the need for restrictive 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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