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Swiss Franc struggles as US Dollar steadies, SNB keeps negative rates on table

  • USD/CHF holds firm as the US Dollar shows signs of stabilizing near three-month lows.
  • SNB policymaker Petra Tschudin keeps the door open to negative interest rates.
  • US fiscal concerns and fading Fed rate-hike bets weigh on the US Dollar outlook.

USD/CHF holds firm on Friday as the US Dollar (USD) trims its intraday losses. At the time of writing, the pair trades around 0.8013 after slipping to 0.7949 on the previous day, its lowest level since June 17. Despite the modest recovery, USD/CHF remains on track to close the week in negative territory.

Meanwhile, dovish remarks from Swiss National Bank (SNB) Governing Board member Petra Tschudin dampen sentiment toward the Swiss Franc (CHF). Tschudin told Swiss newspaper Finanz und Wirtschaft in an interview published on Friday, “Should it become necessary to lower interest rates below zero to keep inflation between 0% and 2% in the medium term, then we’ll do so.” She also linked the Franc’s weakness to higher interest-rate expectations abroad.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 98.81, recovering from an intraday low of 98.56. However, the index remains close to a three-month low and is heading for a weekly loss of nearly 0.80%.

Data released on Friday showed that the preliminary S&P Global Composite PMI rose to a 52-month high of 56.0 in August from 54.5, while the Services PMI climbed to a 20-month high of 56.8 from 54.6. The Manufacturing PMI eased to a five-month low of 53.2 from 53.9.

The Greenback weakened against its G10 peers earlier this week after the US Treasury announced that it would double its liquidity-support buybacks for longer-dated government securities to at least $4 billion per operation. Strategists at Scotiabank argue that the currency remains the primary shock absorber for mounting US fiscal concerns, noting that “at this point, we still think that efforts to suppress long-term yields mean that the USD will bear a greater—negative—burden from US fiscal policy concerns.”

Fading expectations of a Federal Reserve (Fed) interest-rate hike also weigh on the US Dollar. According to the CME FedWatch Tool, markets see around a 65% probability that the central bank will leave interest rates unchanged next month following softer US employment and inflation data for July. Attention now turns to next week’s US Personal Consumption Expenditures (PCE) inflation data.

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

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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