Why has the Swiss Franc fallen to fresh monthly lows amid higher US yields and a hawkish Fed?

USD/CHF is heading for its biggest weekly gain in two years after climbing to a new one-month high of 0.8368.
The US Dollar is gaining broadly as markets increasingly price in a jumbo Fed rate hike in December.
For ING experts, 0.8400 is a crucial level to watch in the pair.

Bullish momentum continues to support the US Dollar (USD) against the Swiss Franc (CHF) on Friday, putting USD/CHF on course for its strongest weekly showing in two years. The pair has advanced for a fourth straight day, touching a session high of 0.8368 so far. Higher US Treasury yields are underpinning the move as Federal Reserve (Fed) officials signal that a 50-basis-point rate hike remains possible in December.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A sharp increase in speculative US Dollar long positions this week followed the stronger-than-expected Consumer Price Index (CPI) data published on Tuesday, which led Federal Reserve (Fed) officials to raise the prospect of a jumbo December rate hike.

Speaking on Monday, Fed Governor Christopher Waller warned that, should October consumer inflation reach 0.3% or more, “hiking only 25 basis points would put our credibility at risk”. October CPI ultimately increased by 0.4%. 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.”

Can USD/CHF Clear a Key Level as Dollar Strength Weighs on Franc and Yen?

The probability of the Fed opting for a large December hike has risen to 13%, compared with none a week earlier, according to the CME’s FedWatch Tool. Against this backdrop, the US two-year Treasury yield has climbed about 32 basis points this week. The benchmark 10-year note’s yield has gained 27 basis points, moving back above 5%. The resulting support for the US Dollar has driven sharp gains against most of its peers.

Explaining the pressure on the two currencies, ING analysts observe 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 experts highlight 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,"

Meanwhile, Switzerland’s Producer Price Index (PPI) data, published earlier on Friday, showed annual inflation picking up to 0.9% in October from September’s 0.3%. Markets had expected a modest easing to 0.2%. Monthly PPI rose to 0.9%, largely undoing September’s 0.2% decline. Nevertheless, the figures leave intact the view that the Swiss National Bank (SNB) will maintain its current monetary policy in the near term.

Swiss Franc: Frequently Asked Questions

Which factors shape movements in the Swiss Franc?

As Switzerland’s official currency, the Swiss Franc (CHF) ranks among the world’s ten most actively traded currencies, with trading volumes far larger than the Swiss economy itself. Broad market sentiment, domestic economic conditions and decisions by the Swiss National Bank (SNB) are among the influences on its value. From 2011 to 2015, the Franc was pegged to the Euro (EUR). The sudden removal of that peg sent the Franc more than 20% higher and triggered market turmoil. Although the peg no longer operates, the Swiss economy’s heavy reliance on the neighbouring Eurozone means CHF movements still tend to track those of the Euro closely.

What gives the Swiss Franc its safe-haven status?

Investors often turn to the Swiss Franc (CHF) during periods of market stress, giving it a reputation as a safe-haven asset. That appeal reflects perceptions of Switzerland’s stable economy, robust export sector, sizeable central bank reserves and longstanding policy of neutrality in global conflicts. Together, these features make its currency attractive to investors seeking to avoid risk. During turbulent periods, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

How can Swiss National Bank decisions move the Swiss Franc?

Monetary policy is decided by the Swiss National Bank (SNB) at four meetings each year, held once a quarter, a less frequent schedule than that of other major central banks. Its objective is annual inflation below 2%. If inflation exceeds the target, or is expected to do so in the foreseeable future, the SNB will seek to restrain price increases by lifting its policy rate. Such increases typically support the Swiss Franc (CHF): higher interest rates raise yields and improve Switzerland’s appeal to investors. Rate reductions, by contrast, generally put downward pressure on CHF.

What do economic releases mean for the Swiss Franc’s value?

Switzerland’s macroeconomic releases provide an important gauge of economic conditions and can influence the valuation of the Swiss Franc (CHF). Although the economy is generally stable, abrupt shifts in growth, inflation, the current account or central bank currency reserves can set CHF in motion. Strong growth, low unemployment and buoyant confidence usually support the currency. Data signalling a loss of economic momentum, on the other hand, is likely to lead to CHF depreciation.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland’s small, open economy relies heavily on the economic health of its Eurozone neighbours. Its principal economic partner and an important political ally is the broader European Union. Stability in Eurozone macroeconomic conditions and monetary policy is therefore vital to Switzerland and, in turn, to the Swiss Franc (CHF). Reflecting this dependence, some models put the correlation between the Euro (EUR) and CHF at more than 90%, close to a perfect correlation.