- USD/CHF advances as the US Dollar gains ground amid rising Treasury yields.
- The Greenback may struggle due to the rising odds of a 50-basis point Fed rate cut in September.
- Traders await the SNB’s FX Reserves data to understand the central bank’s interventions in influencing the Swiss Franc.
USD/CHF breaks its six-day losing streak, trading around 0.8590 during the Asian session on Wednesday. This upside is attributed to the improved US Dollar (USD) amid rising Treasury yields. The US Dollar Index (DXY) extends its gains for the second day, reaching 103.30 with 2-year and 10-year yields on US Treasury bonds standing at 4.02% and 3.91%, respectively, at the time of writing.
However, the rising expectations of a more aggressive rate cut starting in September after the weaker US employment data in July raised the fear of a looming US recession. This may put a cap on the upside of the USD/CHF pair. According to the CME FedWatch tool, there is now a 67.5% probability of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September, up from 13.2% a week earlier.
According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly noted on Monday that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.” Additionally, Chicago Fed President Austan Goolsbee stated that the central bank is prepared to act if economic or financial conditions worsen.
In Switzerland, Real Retail Sales unexpectedly dropped by 2.2% year-on-year in June, falling short of market expectations for a 0.5% increase and following a revised 0.2% decline in May. This represents the second consecutive month of contraction in retail sales and the most significant decline since September 2023, data showed on Tuesday.
In July, the Swiss Unemployment Rate remained steady at 2.3% on a non-seasonally adjusted basis, unchanged from the previous three months. However, the seasonally adjusted jobless rate slightly increased to 2.5%, up from 2.4% previously.
Traders are likely looking out for the Foreign Currency Reserves data by the Swiss National Bank (SNB) scheduled to be released on Wednesday. This information sheds light on the SNB's activities in the currency market, particularly their efforts to influence the exchange rate of the Swiss Franc.
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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