Swiss Franc falls to new monthly lows as US yields rise and Fed maintains hawkish stance

• At 0.8368, a new one-month high, USD/CHF is heading for its largest weekly gain in two years.
• The US Dollar gains broadly as expectations build for an outsized Fed rate increase in December.
• For USD/CHF, ING experts identify 0.8400 as a pivotal level.

Higher US Treasury yields are supporting the US Dollar (USD) against the Swiss Franc (CHF) on Friday, with Federal Reserve (Fed) officials signalling that a 50-basis-point rate increase in December is possible. Extending its advance into a fourth consecutive day, USD/CHF has touched a session high of 0.8368 and is heading for its strongest weekly performance in two years.

Following Tuesday’s stronger-than-expected Consumer Price Index (CPI)  figures, Federal Reserve (Fed) officials raised the prospect of an outsized December rate increase. Speculative traders have consequently increased their long positions in the US Dollar this week. 

October’s CPI ultimately rose 0.4%. Before the release, Fed Governor Christopher Waller had said on Monday that, if consumer inflation reached 0.3% or more in October, “hiking only 25 basis points would put our credibility at risk”. Dallas Fed President Lorie Logan echoed that position a few days later, stating that “the FOMC needs to implement at least two more 25-basis-point rate increases.” 

US Dollar gains weigh on Franc and Yen as USD/CHF approaches key level

According to the CME’s FedWatch Tool, the market-implied probability of a larger Fed rate increase in December has risen to 13%, from none a week earlier. Against that backdrop, the US two-year Treasury yield has climbed about 32 basis points this week, while the benchmark 10-year yield has gained 27 basis points to move back above 5%. The US Dollar has surged against most of its peers as a result.

ING analysts highlight the pressure on the two currencies, noting that "the low-yielding Swiss franc and the Yen have some of the highest correlations with US rates and are under pressure."

In a note, ING’s experts identify the significance of the next resistance level: "0.8400 is a really important resistance area for USD/CHF and will probably help determine whether the dollar needs to take another big leg higher over the coming weeks,"

October’s Swiss Producer Price Index (PPI), published earlier on Friday, showed annual inflation accelerating to 0.9% from September’s 0.3%, rather than easing modestly to 0.2% as markets had expected. The monthly PPI rose to 0.9%, largely offsetting September’s 0.2% decline. Despite the figures, the prevailing view remains that the Swiss National Bank (SNB) will leave monetary policy unchanged in the near term.