USD/CHF pares recent gains from the previous session, trading around 0.7940 during Asian hours on Monday. The pair declines as the US dollar suffers ahead of the release of the US third-quarter annual GDP report on Tuesday.
The US dollar may regain strength due to dovish sentiment surrounding the Fed’s policy outlook. Cleveland Fed President Beth Hammack said Sunday that monetary policy is well positioned to pause and assess the effects of 75 basis point interest rate cuts on the economy during the first quarter, according to Bloomberg.
The CME FedWatch tool indicated a 79.0% probability of holding interest rates at the Fed’s January meeting, up from 75.6% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 21.0% from 24.4% a week ago.
However, US President Donald Trump said last week that the next head of the Federal Reserve (Fed) will be someone who believes in significantly lower interest rates. Meanwhile, Fed Governor Christopher Waller, who is under consideration for the role, said: “Given that inflation is still high, we can take our time – there is no rush to get down. We can steadily lower interest rates towards neutral.”
Traders will likely be watching Switzerland’s ZEW December forecast survey due on Tuesday for fresh signals on business and employment conditions, while looking for clarity on the Swiss National Bank’s interest rate outlook, with a return to negative interest rates seen as unlikely due to the potential hit to savers and pension funds.
Frequently asked questions about the Swiss franc
The Swiss Franc (CHF) is the official currency of Switzerland. It is among the top ten most traded currencies in the world, with its volume exceeding the size of the Swiss economy. Its value is determined by 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 suddenly removed, causing the value of the franc to rise by more than 20%, causing turmoil in the markets. Although the peg is no longer in effect, the fortunes of the Swiss franc tend to be highly correlated with the euro due to the high dependence of the Swiss economy on the neighboring eurozone.
The Swiss Franc (CHF) is a safe-haven asset, or the currency that investors tend to buy during times of market stress. This is due to Switzerland’s perceived status in the world: a stable economy, a strong export sector, large central bank reserves or a long-standing political stance towards neutrality in global conflicts, making the country’s currency a good choice for risk-averse investors. Turbulent times are likely to strengthen the value of the Swiss franc against other currencies that are seen as riskier to invest in.
The Swiss National Bank meets four times a year – once every three months, 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 expected to be above target in the foreseeable future, the bank will attempt to tame price growth by raising the interest rate. Higher interest rates are generally a positive for the Swiss Franc (CHF) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the Swiss franc.
Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can influence the valuation of the Swiss franc (CHF). The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or central bank currency reserves would lead to movements in the Swiss franc. In general, high economic growth, low unemployment and high confidence are good for the Swiss franc. Conversely, if economic data indicates weak momentum, the value of the Swiss franc is likely to decline.
As a small and open economy, Switzerland is highly dependent on the health of neighboring economies in the eurozone. The wider European Union is Switzerland’s main economic partner and a key political ally, so the stability of macroeconomic and monetary policy in the euro area is essential for Switzerland, and therefore for the Swiss franc (CHF). With such a dependence, some models suggest that the correlation between the fortunes of the euro (EUR) and the Swiss franc is over 90%, or close to perfect.
