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USD/CHF trades with negative bias around 0.8400, downside potential seems limited

  • USD/CHF attracts some sellers on Thursday amid a modest USD weakness.
  • The US-China trade deal optimism might cap the CHF and support the pair.
  • Traders look to the Swiss/US PPI and Fed Chair Powell for a fresh impetus.

The USD/CHF pair struggles to capitalize on the previous day's modest gains and meets with a fresh supply during the Asian session on Thursday. The intraday downtick is sponsored by the emergence of some US Dollar (USD) selling and drags spot prices back below the 0.8400 mark in the last hour, though it lacks bearish conviction.

The US Dollar (USD) ticks lower as bulls opt to wait for the release of the US Producer Price Index (PPI) and Federal Reserve (Fed) Chair Jerome Powell's appearance later today. Apart from this, a slight deterioration in the global risk sentiment – as depicted by a generally weaker tone around the equity markets – benefits the Swiss Franc's (CHF) relative safe-haven status and exerts some downward pressure on the USD/CHF pair.

However, the optimism over the US-China trade truce for 90 days and the de-escalation of a trade war between the world's two largest economies keeps a lid on any further gains for the CHF. Furthermore, expectations of fewer interest rate cuts by the Fed, amid easing market concerns about a US recession, act as a tailwind for the Greenback and help limit the downside for the USD/CHF pair, warranting caution for bearish traders.

Traders now look forward to the Swiss PPI print for short-term opportunities. Nevertheless, the fundamental backdrop supports prospects for the emergence of some dip-buying at lower levels. Hence, it will be prudent to wait for strong follow-through selling below the 0.8325 area, or the overnight swing low, before confirming that the recent recovery from the 0.8040 area, or the lowest level since August 2011, has run out of steam.

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

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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