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Swiss Franc advances as risk-on mood weakens USD

  • USD/CHF falls as fading safe-haven demand weakens the US Dollar amid growing optimism over a potential US-Iran agreement.
  • The US and Iran are reportedly close to signing an agreement involving a 60-day ceasefire extension.
  • SNB's Martin Schlegel stated the central bank remains highly willing to intervene in foreign exchange markets if necessary.

USD/CHF extends its losing streak for the fourth consecutive day, trading around 0.7820 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) declines on fading safe-haven demand amid increasing optimism over a potential US-Iran agreement, which has eased broader market concerns about inflation and impending Federal Reserve (Fed) interest rate hikes.

According to an Axios report citing a US official, the United States (US) and Iran are close to signing an agreement that involves a 60-day ceasefire extension. Under this proposed deal, the Strait of Hormuz would be reopened, and Iran would agree to clear mines it deployed in the waterway while allowing ships to pass freely. In exchange for these actions, the United States would lift its current blockade on Iranian ports.

However, the downside of the Greenback could be restrained amid rising inflationary pressures, which have shifted the Fed expectation toward potential future interest rate hikes rather than cuts. Markets are currently pricing in a 45.1% probability that the Fed will raise interest rates by 25 basis points by year-end, according to the CME FedWatch tool.

Meanwhile, investors are continuing to assess the future outlook for Federal Reserve policy. This caution comes after Federal Reserve Governor Christopher Waller signaled that he no longer believes the central bank should retain an easing bias in its official policy statement, adding another layer of complexity to the global economic landscape.

Swiss National Bank (SNB) Vice Chairman Martin Schlegel stated last week that the central bank maintains an elevated willingness to intervene in foreign exchange markets if necessary. Schlegel also noted that Swiss inflation currently remains within the central bank's price stability range. These remarks signal that policymakers continue to monitor both price developments and currency conditions closely.

Meanwhile, traders are seeking fresh cues regarding whether the Swiss National Bank will call for an exit from its dovish monetary policy stance. This heightened scrutiny comes as rising global inflationary pressures persist, driven largely by elevated international oil prices.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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