- USD/CHF edges lower to 0.8905 in Wednesday’s early European session.
- Financial markets expect two or potentially three rate cuts this year, with the first rate cut starting in September.
- SNB rate-cut expectation might weigh on the CHF.
The USD/CHF pair trades on a weaker note near 0.8905 during the early European session on Wednesday. The weakness of the pair is supported by the prospect of US Federal Reserve (Fed) rate cuts this year, which drag the Greenback lower across the board. Traders await the preliminary US July S&P Global Purchasing Managers Index (PMI) for fresh impetus.
The rising bets that the Fed would start easing its monetary policy in September appear to cap the Greenback’s upside. The markets expect two or potentially three rate cuts this year. According to the CME FedWatch Tool, traders have priced in almost a 96% chance of a Fed rate cut in September this year.
However, these odds might be changed with key US economic data later this week. Investors expect to see an improvement in the US manufacturing sector, and the stronger-than-expected US PMI might cap the downside for USD/CHF. The US Gross Domestic Product (GDP) for the second quarter will be released on Thursday, followed by Personal Consumption Expenditures Price Index (PCE) data for June on Friday.
Data released on Tuesday from the US docket showed that the Existing Home Sales declined by 5.4% MoM in June from 4.11M to 3.89M, below the market consensus. Meanwhile, the Richmond Fed Manufacturing Index arrived at -17 in July versus -10 prior.
The expectation that the Swiss National Bank (SNB) might further cut interest rates in September has weighed on the Swiss Franc (CHF) in the previous sessions. FX markets analyst at Ballinger Group, Kyle Chapman, said that the SNB is expected to cut a third rate next quarter and potentially decide a fourth cut in December. Additionally, the political uncertainty in the United States contributes to volatility in the US Dollar (USD) and boosts safe-haven assets like the 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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