Swiss Franc holds losses as US Dollar recovers on Middle East tensions

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USD/CHF inches lower after opening at a bullish gap, remaining in positive territory and trading around 0.8060 during the Asian hours on Thursday.

USD/CHF remains stronger as the US Dollar recovers, fueled by safe-haven buying and prolonged high Fed rates.
June CPI and PPI reports fell below market expectations, temporarily easing immediate fears of further rate hikes.
Swiss Franc safe-haven demand, fueled by oil supply disruptions and rising inflation fears, points to further downside for USD/CHF.

USD/CHF inches lower after opening at a bullish gap, remaining in positive territory and trading around 0.8060 during the Asian hours on Thursday. The pair holds ground as the US Dollar (USD) recovers its daily losses amid rising risk aversion, which could be attributed to United States (US)-Iran tensions boosting oil prices and sparking fresh inflation concerns. This geopolitical friction threatens to prolong the Federal Reserve's (Fed) higher interest rate environment.

The Guardian reported that the US Central Command (CENTCOM) launched another wave of strikes as part of a concerted effort to keep the critical Strait of Hormuz open. In a direct escalation of hostilities, CENTCOM confirmed that US aircraft fired missiles into an oil tanker’s smokestack within the strategic passage, effectively disabling the vessel and keeping global markets on edge.

Amid this escalating conflict in the Middle East, traders are closely assessing the Federal Reserve's policy outlook in light of recently softened US inflation data. Tuesday’s US Consumer Price Index (CPI) declined to 3.5% in June from the three-year high of 4.2% set in May, coming in well below the market expectation of 3.8%. This weaker consumer inflation data initially helped reduce immediate concerns that the Fed would soon raise interest rates.

CME FedWatch Tool suggests that markets scaled back expectations for a Fed rate hike in September, with the implied probability falling to around 44% from 50% just a day earlier. However, because the interim US-Iran peace agreement reached last month has effectively unraveled, June’s inflation data does not yet capture the economic impact of this latest military escalation between the US and Iran.

Further supporting this cooling trend, Wednesday's data showed the US Producer Price Index (PPI) declined to 5.5% on a yearly basis in June, down from 6% in May and below the market expectation of 6.2%. On a monthly basis, the PPI dropped by 0.3%, a notable shift from the 0.6% increase recorded in May and an improvement compared to analysts' estimates of no change.

The USD/CHF pair faces further downside as rising inflation fears, triggered by oil supply disruptions, fuel safe-haven demand for the Swiss Franc (CHF). Meanwhile, the Swiss National Bank (SNB) maintained its policy rate at 0%. The central bank reconfirmed its readiness to step into the foreign exchange markets to prevent an excessive appreciation of the franc and shield the economy from imported inflation.

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.