Swiss Franc nears yearly lows as Fed rate hike bets boost US Dollar
- USD/CHF rallies for the seventh consecutive day, approaching 15-month highs, at 0.8207.
- Rising bets that the Fed will hike rates this week are boosting the US Dollar.
- Fed-SNB monetary policy divergence is likely to keep the Swiss Franc under pressure.
The Swiss Franc (CHF) keeps trading lower against the US Dollar (USD) on Monday, as investors brace for a quarter-point interest rate hike by the Federal Reserve (Fed) later in the week, and Oil prices consolidate above $100.00. The USD/CHF pair appreciated for the seventh consecutive day, reaching session highs at 0.8195, a few pips below the 15-month peak of 0.8207 hit in Late July.
US Consumer Price Index (CPI) figures released last Friday confirmed that inflationary pressures keep growing at levels well above the Fed’s 2% target, which cemented hopes that the bank will tighten borrowing costs at its Wednesday meeting, and maybe another time in December. Futures markets are pricing a nearly 90% chance of a Fed hike on Wednesday, and above 70% chances of at least another rate hike before the year-end, according to data by the CME's FedWatch Tool.
These expectations highlight a monetary policy divergence with the Swiss National Bank (SNB), which is widely expected to leave its benchmark interest rate steady at the current 0% at least until mid 2027. Against this backdrop, interest rate differentials are highly likely to keep the Swissie under pressure.
Oil prices put additional weight on the CHF
Beyond that, Crude prices consolidate above the key $100 level, putting additional pressure on the Oil-importing Swiss economy. Brent Crude trades a few cents below $105.00, as the situation in the Middle East complicates further. The Strait of Hormuz is practically closed following a series of attacks on commercial vessels over the weekend, while the progress of the Houthi militias in the Red Sea threatens to blockade the Strait of Bab el-Mandeb, the alternative route for Oil exports from Gulf countries. This would force a much longer rerouting of Oil tankers, ultimately boostirng Crude prices higher.
In Switzerland, data released on Monday showed that the Producer and Import Prices Index (PPI) accelerated to a 0.7% growth in August, beating expectations of a 0.1% uptick and following a 0.1% contraction in July. Year-over-year (Y-o-Y), producer prices dropped at a 0.7% pace, following a 2.1% decline in July. These data do not alter the view of a steady SNB policy, and therefore, the impact on the CHF has been negligible.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
