USD/CHF slides to mid-0.8000s on weaker USD; downside potential seems limited
- USD/CHF meets with a fresh supply on Friday amid renewed USD selling bias.
- Bets for an imminent Fed rate cut next month continue to undermine the USD.
- A positive risk tone and trade jitters might cap the CHF and support spot prices.
The USD/CHF pair struggles to capitalize on the previous day's move higher and attracts fresh sellers on Friday amid a broadly weaker US Dollar (USD). Spot prices currently trade around mid-0.8000s and remain close to a two-week low touched on Wednesday.
The initial market reaction to Thursday's hotter-than-expected US Producer Price Index (PPI) turns out to be short-lived amid the growing acceptance that the Federal Reserve (Fed) might still cut interest rates in September. The dovish outlook prompts fresh USD selling, which, in turn, is seen as a key factor exerting downward pressure on the USD/CHF pair.
Meanwhile, an extension of the US-China tariff truce for another three months eased concerns about a trade war between the world's two largest economies. Moreover, hopes that the US-Russian summit will increase the chances of ending the prolonged war in Ukraine remain supportive of the upbeat market mood and might cap the safe-haven Swiss Franc (CHF).
Apart from this, persistent trade-related uncertainties might hold back the CHF bulls from placing aggressive bets and act as a tailwind for the USD/CHF pair. In fact, Switzerland faces a crippling 39% tariff on its exports to the US. Given that the US is the most important destination for Swiss products, this fuels worries about the potential negative impact on the economy.
Hence, it will be prudent to wait for strong follow-through selling before positioning for any further depreciating move for the USD/CHF pair. Traders now look forward to the US economic docket – featuring monthly Retail Sales figures, the Empire State Manufacturing Index, followed by the University of Michigan Consumer Sentiment and Inflation Expectations Index.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
