Swiss Franc weakens as safe-haven demand lifts US Dollar
- USD/CHF as safe-haven dollar demand grew amid US-Iran tensions.
- The CME FedWatch Tool shows September Fed rate hike odds rose to 64.2%, up from 57.8% a day earlier.
- Rising geopolitical risks pushed the SNB to reiterate FX interventions to curb a surging franc and safeguard price stability.
USD/CHF extends its gains for the second successive day, trading around 0.8110 during the Asian hours on Tuesday. The pair appreciates as the US Dollar (USD) receives support from rising safe-haven demand amid ongoing hostilities between the United States (US) and Iran, which drove oil prices higher, reviving concerns about inflation and interest rate hikes.
CME FedWatch Tool suggests that markets price in 64.2% odds of a September Fed rate hike, compared to 57.8% a day earlier. In the meantime, Federal Reserve officials have entered their traditional blackout period ahead of next week's FOMC meeting, where policymakers are widely anticipated to hold the federal funds rate steady.
US attacks on Iran continued for a tenth straight day. The ongoing campaign has coincided with continued retaliatory strikes from Tehran against neighboring countries, further escalating instability across the region.
Although the Swiss National Bank (SNB) maintains a stable medium-term inflation outlook, recent meeting minutes reveal growing caution among policymakers. Escalating geopolitical tensions have increased short-term inflation risks, leading the SNB to reaffirm its readiness to intervene in foreign exchange markets to curb excessive franc appreciation and safeguard price stability. Investors now turn their attention to June’s Trade Balance data, scheduled for release later in the day.
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.
