USD/CHF holds gains near 0.7700 amid Middle East tensions

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USD/CHF edges higher to near 0.7695 in Monday’s early Asian session.
Escalating tensions in the Middle East could boost the safe-haven flows.
The US PPI rose 0.5% MoM in January, stronger than expected.

The USD/CHF pair holds positive ground around 0.7695 during the early Asian session on Monday. Traders continue to assess the impact of the escalating Mideast war after the US and Israel strike on Iran over the weekend. The Institute for Supply Management (ISM) will release its Manufacturing Purchasing Managers Index (PMI) report for February later on Monday.

The US and Israel began "major combat operations" in Iran over the weekend. Iran has responded by firing drones and missiles into Israel and American targets, including the United Arab Emirates, Bahrain, Qatar, Kuwait, and Jordan.

In Iran, Supreme Leader Ayatollah Ali Khamenei was killed after the US and Israel launched a "massive" and ongoing attack against Iran's leadership and military, per CNBC. The group will continue to run the country until a new leader is named

Traders will closely monitor the developments surrounding the US-Iran conflict. Any signs of escalating tensions in the Middle East could boost the safe-haven currency, such as the Swiss Franc (CHF), in the near term.

On the other hand, a hotter-than-expected US Producer Price Index (PPI) report could lift the Greenback against the CHF. The headline US PPI rose 0.5% month-over-month in January, surpassing the 0.3% forecast. Market participants now largely expect the US Federal Reserve (Fed) to hold rates steady at the March meeting.

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.