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Swiss Franc strengthens as US Dollar struggles despite increased risk aversion

  • USD/CHF may rebound as the US Dollar may regain ground on safe-haven demand from ongoing Middle East conflicts.
  • Israel’s Home Front Command issued an early warning following rocket launches from Lebanon targeting northern Israel.
  • Softer UBS capital rules being considered by Swiss lawmakers could shave off billions in regulatory burdens, potentially weakening the CHF.

USD/CHF depreciates after four days of gains, trading around 0.7990 during the Asian hours on Thursday. However, the downside of the pair could be restrained as the US Dollar (USD) may regain its ground amid rising safe-haven demand due to ongoing Middle East conflict.

Israeli military says that the Home Front Command, the branch of the Israel Defense Forces (IDF) responsible for civil defense, issues an early warning after launches from Lebanon toward northern Israel.

Earlier, US Central Command (CENTCOM) confirmed that the US began airstrikes in Iran on Wednesday. Furthermore, President Donald Trump warned of severe military action if an interim peace deal is not finalized, accusing Tehran of stalling. Iranian officials, however, maintain they will not back down.

Following an incident where an American helicopter was shot down, the US launched "self-defense" strikes, triggering Iranian retaliatory attacks on US military facilities in Bahrain, Jordan, and Kuwait.

Adding to the crisis, the Islamic Revolutionary Guard Corps (IRGC) announced an immediate, total closure of the Strait of Hormuz to all commercial and oil vessels, warning that any transit attempts would be targeted.

May’s US CPI matched forecasts, rising to 4.2% YoY (up from 3.8% in April), while Core CPI ticked up to 2.9% YoY from 2.8%. Market attention now shifts to the upcoming release of the May Producer Price Index (PPI) and Initial Jobless Claims later today.

Swiss lawmakers are considering a new pitch to soften capital requirements on UBS, if implemented, could shave ‌billions of dollars off the burden the bank is facing under a draft law submitted by the government, sources told Reuters.

If implemented, the move would likely have a short-to-medium-term weakening effect on the Swiss Franc (CHF). While it sounds like a paradox, helping Switzerland's biggest bank making the currency drop, it boils down to central bank mechanics, market capital flows, and safe-haven dynamics.

Under the government's original draft law, UBS would have been forced to fully back its foreign subsidiaries with 100% Common Equity Tier 1 (CET1) capital, requiring the bank to raise an estimated $20 billion.

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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