USD/CHF weakens below 0.8750 on risk-on mood, softer US Dollar
|- USD/CHF drifts lower to near 0.8715 in Friday’s early Asian session.
- US July Retail Sales came in better than expected in July, lifting the Greenback.
- The renewed fear of geopolitical tension in the Middle East could support the CHF.
The USD/CHF pair trades on a softer note near 0.8715 during the early European session on Friday. The pair edges lower on the back of the softer US Dollar (USD). Meanwhile, the USD Index (DXY), a measure of the value of the US Dollar relative to a basket of foreign currencies, currently trades around 102.92, losing 0.12% on the day.
The speculation of the US Federal Reserve rate cut in September continues to undermine the Greenback. Nonetheless, traders place lower bets on deeper rate cuts due to the optimistic US Initial Jobless Claims and upbeat Retail Sales data on Thursday. According to the CME FedWatch Tool, financial markets are now pricing in nearly 80%odds of a September rate cut and expect 200 basis points (bps) of reduction in the next 12 months, though that will depend on incoming data.
Switzerland’s Federal Statistical Office (Bundesamt) revealed in its report published on Thursday that the country’s Producer and Import Price Index remained unchanged in July 2024 compared with the previous month. The annual figure declined by 1.7%, compared to the previous reading of a fall of 1.9%, in line with the consensus.
Easing fears about the US economic slowdown boosts investors' sentiment and weighs on the safe-haven currency like the Swiss Franc (CHF). On the other hand, any development surrounding economic uncertainty and geopolitical tension in the Middle East might lift the CHF and create a headwind for USD/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.
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