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Swiss Franc weakens as US Dollar gains on Fed rate hike bets

  • USD/CHF rises as US Dollar advances amid hawkish Fed signals driving up October rate hike expectations past 70%.
  • Geopolitical risks persist as market participants closely monitor US-Iran negotiations and Strait of Hormuz developments.
  • The Swiss Franc continues to struggle following the SNB’s decision to leave key interest rate unchanged at 0% in September.

USD/CHF extends its gains for the fourth consecutive trading day, hovering near fresh 16-month high of 0.8314 during European hours on Monday. The pair rises as the US Dollar (USD) gains strength from hawkish comments made by Federal Reserve (Fed) officials. Financial market participants are focusing on upcoming economic data, including key US employment reports and the Fed's preferred inflation measures.

Cleveland Fed President Beth Hammack cautioned against allowing the public to normalized elevated prices, while Philadelphia Fed President Anna Paulson suggested further rate increases might be warranted. Reflecting these shifts, the CME FedWatch Tool now indicates a greater than 70% probability of a rate hike at the October Federal Reserve meeting, up from 57.6% last week and 17.7% a month ago.

US President Donald Trump rejected Iran’s proposal to reopen the Strait of Hormuz, maintaining that Tehran overplayed its hand, though negotiations are slated to resume this week. Additionally, President Trump signaled confidence that the conflict would conclude soon while keeping open the possibility of further military actions before the midterm elections.

The Swiss Franc (CHF) faces challenges as the Swiss National Bank (SNB) opted to leave its key interest rate unchanged at 0% during its September meeting. The central bank cited elevated uncertainty in the Middle East, which continues to keep global oil prices high, as a primary factor in its decision to pause.

OCBC strategists Sim Moh Siong and Christopher Wong point out that the SNB’s decision to keep rates unchanged at 0% and soften its FX intervention rhetoric signals a greater willingness to live with a firmer currency. In their view, “the revised language suggests greater tolerance for a stable or stronger CHF, which may help offset inflation risks stemming from higher energy prices,” reinforcing their assessment that the Franc will remain primarily a funding currency even as the central bank leans on its strength to contain imported price pressures.

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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