- USD/CHF rises as US Dollar advances amid higher Treasury yields.
- Fed’s Daly stated that the economy is evidently in a stronger position, with a significant decline in inflation.
- Lower Swiss inflation strengthens the likelihood of the SNB delivering another rate cut in December.
USD/CHF appreciates and trades around 0.8680 during the early European hours on Wednesday. This upside of the pair could be attributed to solid US Dollar (USD). Additionally, improved US Treasury yields also contributed support for the Greenback and underpinned the USD/CHF pair.
The US Dollar Index (DXY), which tracks the US Dollar against six major currencies, is trading near a two-month high at 104.30. Meanwhile, yields on 2-year and 10-year US Treasury bonds are at 4.05% and 4.22%, respectively.
Recent indicators of economic strength and worries about a possible rebound in inflation in the United States (US) have reduced the likelihood of a substantial interest rate cut by the Federal Reserve in November. According to the CME FedWatch Tool, there is an 89% chance of a 25-basis-point rate cut, with no expectation for a more significant 50-basis-point reduction.
In a post on the social media platform X, Federal Reserve Bank of San Francisco President Mary Daly stated that the economy is clearly in a better position, with inflation having fallen significantly and the labor market returning to a more sustainable path.
Market participants expect another interest rate cut by the Swiss National Bank (SNB) at its upcoming December meeting. The continued slowdown in Swiss inflation strengthens the dovish sentiment surrounding the SNB. In September, the SNB reduced its key rate for the third time in a row by 0.25%, bringing it to 1%.
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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