By Areena Fx- USD/CHF declines as expectations for further policy easing by the Swiss National Bank diminish.
- September’s Meeting Minutes suggested that the SNB dismissed the likelihood of returning to negative interest rates.
- The US Dollar struggles as traders expect the Fed to deliver a 25-basis-point rate cut on Wednesday.
USD/CHF loses ground for the fourth successive session, trading around 0.7940 during the Asian hours on Tuesday. The pair faces challenges as the Swiss Franc (CHF) strengthened on decreasing expectations of further policy easing by the Swiss National Bank (SNB).
Minutes from the SNB’s September policy meeting indicated that the central bank downplayed deflation risks and ruled out a return to negative interest rates. The SNB emphasized that its monetary policy remains accommodative, with the full effects of previous easing measures still filtering through the economy.
The USD/CHF pair depreciates as the US Dollar (USD) declines on the increased likelihood of a rate cut by the US Federal Reserve (Fed) on Wednesday. The Fed is widely expected to lower interest rates by another 25 basis points, bringing the benchmark rate to 3.75-4.00%, at its October meeting. The CME FedWatch Tool indicates that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 95% possibility of another reduction in December.
However, the US government shutdown has ignited debate among Federal Reserve officials, as policymakers weigh whether to cut rates soon to support a weakening labor market or maintain current levels amid inflation that remains persistently above the Fed’s 2% target.
The downside of the USD/CHF could be restrained as the US Dollar could gain ground due to dampened safe-haven demand, driven by the optimism over the United States (US)-China trade negotiations. Senior officials from the US and China announced over the weekend in Malaysia that they had reached a framework agreement on tariffs and other major issues, setting the stage for Presidents Trump and Xi to finalize the deal during their meeting later this week in South Korea.
Swiss Franc FAQs
What key factors drive the Swiss Franc?
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.
Why is the Swiss Franc considered a safe-haven currency?
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.
How do decisions of the Swiss National Bank impact the Swiss Franc?
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.
How does economic data influence the value of the Swiss Franc?
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.
How does the Eurozone monetary policy affect the Swiss Franc?
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.