- USD/CHF remains on backfoot near 0.8750 despite a sharp recovery in the US Dollar.
- The US Dollar recovers as Fed’s dovish guidance was already factored in by market participants.
- The Swiss Franc exhibits strength ahead of July’s CPI release on Friday.
The USD/CHF pair hovers near more than four-month low around 0.8750 in Thursday’s European trading hours. The Swiss Franc asset remains weak even though the US Dollar (USD) has delivered a strong recovery move after plummeting to a fresh weekly low.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps higher to near 104.35 after rebounding from a weekly low of 103.86.
In spite of a strong reversal move in the US Dollar, weakness in the major points to sheer strength in the Swiss Franc. The Swiss currency exhibits strength ahead of the Consumer Price Index (CPI) report for July, which will be published on Friday.
On month-on-month, price pressures are expected to have deflated by 0.2% after remaining unchanged in June, with annual figures growing steadily by 1.3%. The scenario in which price pressures rose at a slower pace would be favorable for bets supporting more rate cuts by the Swiss National Bank (SNB).
Meanwhile, the US Dollar has recovered at a robust pace as investors had already priced in expectations that the Federal Reserve (Fed) will deliver a dovish guidance on interest rates after leaving them unchanged in the range of 5.25%-5.50% in its monetary policy announcement on Wednesday.
The US Dollar is expected to remain volatile as United States (US) ISM Manufacturing PMI and the Nonfarm Payrolls (NFP) reports for July are lined-up for release. The Manufacturing PMI will be published at 14:00 GMP, while the NFP report is scheduled for Friday.
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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