The USD/CHF pair recorded modest gains around 0.8010 during the early European session on Wednesday. The US dollar strengthened against the Swiss franc (CHF) after US inflation data was broadly in line with estimates. US retail sales and Producer Price Index (PPI) reports will be released later on Wednesday.
Data released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that the US Consumer Price Index (CPI) rose 2.7% year over year in December. This figure follows 2.7% in November and is in line with expectations. Meanwhile, the core CPI, which excludes the more volatile so-called food and energy components, rose 2.6% in December, versus a previous rise of 2.7%. On a monthly basis, the headline and core CPI rose by 0.3% and 0.2%, respectively.
US CPI inflation signals strong expectations that the US Federal Reserve will remain on hold later this month despite unprecedented pressure from the White House to cut interest rates. This in turn pushes the US dollar higher against the Swiss franc. Fed funds futures traders’ quotes showed that a rate cut is unlikely until June.
On the other hand, Fed uncertainty and geopolitical risks could boost traditional safe-haven currencies like the Swiss franc. US President Donald Trump on Sunday threatened Federal Reserve Chairman Jerome Powell with criminal indictment. Elsewhere, the Iranian government has cracked down on large-scale demonstrations, with hundreds of people reportedly killed. Trump has repeatedly threatened to intervene if the Islamic Republic kills protesters.
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 Although the peg is no longer in effect, the fortunes of the Swiss franc tend to be highly correlated with the euro due to the high dependence of the Swiss economy on the neighboring eurozone.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.
