- USD/CHF rebounds to near 0.8850 following the USD’s recovery in a thin volume trading day.
- Investors expect the US Bessent to manage Trump’s agenda without denting geopolitical harmony.
- The SNB could push interest rates into a negative trajectory amid a low-inflation environment.
The USD/CHF pair rebounds to near 0.8850 in the European trading session on Thursday after a sharp sell-off on Wednesday. The recovery move in the Swiss Franc pair is bolstered by the US Dollar (USD), which rebounded in a thin volume trading session due to a holiday in the United States (US) economy on account of Thanksgiving Day.
The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, bounces to near 106.20, at the time of writing. The USD’s recovery came after a 1.9% correction from its two-year high of 108.00, noted on Friday.
The US Dollar drifted into a correction mode as investors watered down so-called “Trump trades” after US President-elect Donald Trump nominated Scott Bessent, a veteran hedge fund manager, for the role of Treasury Secretary. The USD fell sharply as investors anticipated Bessent to fulfill Trump’s economic agenda without jeopardizing fiscal discipline and political steadiness.
Bessent said in an interview with the Financial Times (FT) over the weekend that he will focus on enacting tariffs, however, objectives would be “layered in gradually”.
Going forward, market speculation for the Federal Reserve’s (Fed) monetary policy action in the December meeting will influence the US Dollar. According to the CME FedWatch tool, the probability for the Fed to cut interest rates by 25 basis points (bps) to 4.25%-4.50% next month is 70%.
Meanwhile, the outlook of the Swiss Franc (CHF) remains uncertain amid expectations that the Swiss National Bank’s (SNB) interest rates could return to a negative trajectory. SNB Chairman Martin Schlegel said in an event in Zurich on Friday, “I want to emphasize that lower interest rates, plus negative interest rates, are not excluded from our toolbox.”
Schlegel chose extremely dovish remarks for the interest rate guidance as inflationary pressures in the Swiss economy have remained in their desired range of 0%-2% since June 2023. The Annual Swiss Consumer Price Index (CPI) decelerated to 0.6% in October.
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.
Read the full article here