Swiss Franc strengthens ahead of SNB rate decision

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The USD/CHF pair loses momentum to around 0.7985 during the early European session on Thursday. The United States (US) and Iran signed an interim agreement that would end the Iran war, weighing on the US Dollar (USD) against the Swiss Franc (CHF).

USD/CHF weakens to near 0.7985 in Thursday’s early European session.
The Fed voted unanimously to hold its benchmark federal funds rate in a range of 3.5% to 3.75% at its June policy meeting.
The Swiss National Bank is likely to leave its key policy rate unchanged at 0% on Thursday.

US President Donald Trump and Iran’s President Masoud Pezeshkian on Wednesday electronically signed a memorandum of understanding to end the US and Israel’s war on Iran. Pakistan’s Prime Minister Shehbaz Sharif said that the agreement is taking “immediate effect” after being signed by both Washington and Tehran.

Federal Reserve (Fed) officials left interest rates unchanged in the 3.50%-3.75% range at its June policy meeting while signaling the possibility of higher rates later this year as the central bank gauges the inflation effects of the Iran conflict.

Traders have now fully priced in a rate hike in the coming months as the US central bank focuses on price stability over employment. A hawkish tone from the Fed could support the Greenback in the near term.

The SNB is expected to keep its key policy rate at 0% at the June policy meeting on Thursday and for the rest of the year, according to all the economists who responded to a Reuters poll.

"With those opposing forces from FX and energy prices at play ‌and Switzerland's low inflation starting point, we think inflation pressures weigh less on the SNB than on most central banks ... Our base case remains the zero‑interest‑rate policy stays in place until end-2027,” said Chiara Angeloni, Europe economist at Bank of America.

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.