- USD/CHF rises as US dollar advances amid higher Treasury yields.
- The Fed’s Mary Daly said the economy is clearly in a stronger position, with inflation declining significantly.
- Lower Swiss inflation increases the likelihood that the SNB will make another rate cut in December.
USD/CHF appreciates and trades around 0.8680 during the early European hours on Wednesday. This rise in the pair could be attributed to the strength of the US Dollar (USD). Furthermore, improving US Treasury yields also helped support the Dollar and underpinned the USD/CHF pair.
The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading near a two-month high of 104.30. Meanwhile, the 2-year and 10-year US Treasury yields are at 4.05% and 4.22%, respectively.
Recent indicators of economic strength and concerns about a possible spike 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 of a more significant 50 basis point reduction.
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Market participants expect another interest rate cut by the Swiss National Bank (SNB) at its next meeting in December. The continued slowdown in Swiss inflation reinforces the dovish sentiment around the SNB. In September, the SNB reduced its key rate for the third consecutive time by 0.25%, bringing it to 1%.
Swiss Franc FAQs
The Swiss Franc (CHF) is the official currency of Switzerland. It is among the ten most traded currencies globally, reaching volumes that far exceed the size of the Swiss economy. Its value is determined by general market sentiment, the economic health of the country or measures 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 value of the franc, causing turbulence in the markets. Although the peg is no longer in force, the fortunes of the Swiss franc tend to be highly correlated with that of the euro due to the Swiss economy’s high dependence on the neighboring eurozone.
The Swiss Franc (CHF) is considered a safe haven asset, or a currency that investors tend to buy during times of market stress. This is due to the perception of Switzerland in the world: a stable economy, a strong export sector, large central bank reserves or a long-standing political stance towards neutrality in global conflicts make the country’s currency a good option for investors who shy away from risks. Turbulent times are likely to strengthen the value of CHF against other currencies that are considered riskier to invest in.
The Swiss National Bank (SNB) meets four times a year (once a 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 exceeds the target or is expected to exceed it in the foreseeable future, the bank will attempt to control price growth by raising its reference rate. Higher interest rates are usually 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 the CHF.
Macroeconomic data published in Switzerland is essential to assess the state of the economy and can affect the valuation of the Swiss Franc (CHF). The Swiss economy is broadly stable, but any sudden changes in economic growth, inflation, current account or central bank foreign exchange reserves have the potential to trigger moves in the CHF. In general, high economic growth, low unemployment and high confidence are good for the CHF. Conversely, if economic data points to weakening momentum, the CHF is likely to depreciate.
As a small, open economy, Switzerland relies heavily on the health of neighboring Eurozone economies. The European Union as a whole is Switzerland’s main economic partner and a key political ally, so the stability of macroeconomic and monetary policy in the eurozone is essential for Switzerland and, therefore, for the Swiss Franc (CHF). With such dependence, some models suggest that the correlation between the fortunes of the Euro (EUR) and the Swiss Franc is greater than 90%, or almost perfect.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
