The USD/CHF pair is losing momentum to around 0.8030 during the early European session on Friday. Growing bets on a cut in US interest rates next week and the possibility of White House Economic Advisor Kevin Hassett taking over as Chairman of the Federal Reserve (Federal Reserve) are weighing on the US dollar (USD) against the Swiss franc (CHF). The US Personal Consumption Expenditures (PCE) Price Index inflation report for September will take center stage later Friday.
The US dollar remains under selling pressure as traders increase expectations that the US central bank will cut interest rates by 25 basis points at its December meeting. According to the CME FedWatch tool, financial markets currently expect about an 85% chance of a quarter-point rate cut next week.
Moreover, US President Donald Trump said on Tuesday that he intends to announce his choice to succeed Jerome Powell as Chairman of the Federal Reserve early next year. White House economic adviser Kevin Hassett has emerged as the front-runner to be the next head of the Federal Reserve, which could drag the US dollar lower, as analysts believe Hassett is expected to push for more interest rate cuts.
Switzerland’s consumer price index unexpectedly fell to 0% in November, and the core index slowed to its lowest level in four years, the Swiss Federal Statistics Office showed on Wednesday. The weaker than expected inflation reading supports the view that the Swiss National Bank (SNB) will maintain an accommodative monetary policy. This, in turn, could lead to a weakening of the Swiss franc (CHF) against the dollar and act as a tailwind for the pair.
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 Although the peg is no longer in effect, the fortunes of the Swiss franc tend to be highly correlated with the euro due to the high dependence of the Swiss economy on the neighboring eurozone.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.
