- The Swiss Franc gains against the Greenback on Friday after US Producer Price Index data falls short of estimates.
- Overall PPI fell and core factory gate prices flatlined for three consecutive months.
- The data substantially increases the probabilities of interest rates falling in the US in the future.
The Swiss Franc (CHF) rises against the US Dollar (USD) on Friday after the release of factory-gate inflation in the form of the US Producer Price Index (PPI). The data shows wholesale price gains in December were lower than economists had estimated. This increases the probability interest rates in the US will fall earlier than had been expected. Since lower interest rates tend to attract less foreign capital inflows, the news is bearish for the US Dollar.
Daily digest market movers: Swiss Franc rises after factory gate prices fall for third consecutive month
- The Swiss Franc gains against the US Dollar after US PPI inflation data for the month of December shows overall wholesale prices falling for the third consecutive month. The data is likely to feed through into consumer prices, leading to lower overall inflation in the future.
- Overall PPI on a monthly basis declined for the third month in a row in December, dropping by 0.1% when a 0.1% rise had been forecast. The 0% initial reading for the previous month of November was revised down to a 0.1% fall.
- The Producer Price Index ex Food and Energy, which is seen as the more representative reading, rose by 1.8% in December compared to a year ago. This was lower than the 1.9% gain forecast and the 2.0% registered in November.
- On a monthly basis the PPI ex Food and Energy data showed prices flatlining for three consecutive months, something which the US Federal Reserve will probably take note of at its next meeting when it next comes to set interest rates. PPI stood unchanged in December compared to the previous month, which was lower than the 0.2% rise estimate, and the same as the flat reading in November.
- Overall PPI inflation on a yearly basis came out at 1.0% YoY, undercutting the 1.3% expected but higher than the 0.8% of November.
- The release of the PPI data led to a surge in the market-gauged probability of the Federal Reserve (Fed) cutting interest rates at its meeting in March 2024. The estimated odds rose to 77% at the time of writing after the PPI on Friday, from around 63% after the Consumer Price Index data released on Thursday.
- The odds now strongly favor the Fed cutting interest rates from 5.5% to 5.25% in March.
- This stands in stark contrast to the Swiss National Bank (SNB), which has not said it is considering cutting interest rates at all.
Swiss Franc technical analysis: USD/CHF could resume long-term downtrend
USD/CHF – the number of Swiss Francs (CHF) that one US Dollar (USD) can buy – declines on Friday, falling back into lockstep with the longer-term bear trend, Since the trend is likely to extend the move favors short-holders.
US Dollar vs Swiss Franc: 4-hour Chart
The current four-hour bar is painted red as the pair sells off after the release of the PPI data. A break below the January consolidation range lows at 0.8465 would add confirmatory technical evidence to the view the downtrend is resuming, and see prices likely fall back to the November lows at 0.8332.
It would take a break above the major trendline for the downmove at around 0.8600 to confirm a change in the short-term bear trend and more upside. But the next target after that would be the 200-four-hour Simple Moving Average (SMA) not much higher at circa 0.8630.
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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