USD/CHF rebounds to near 0.8550 as traders await FOMC Minutes
- USD/CHF trades on a stronger note around 0.8545 in Wednesday’s Asian session.
- Rising Fed rate cut expectations might cap the pair’s upside.
- The Fed Chair Jerome Powell’s speech on Friday will be closely watched.
The USD/CHF pair holds positive ground near 0.8545 on Wednesday during the early European trading hours. The modest recovery of the Greenback provides some support to the major pair. However, the upside of the pair might be limited due to the rising expectation that the US Federal Reserve (Fed) will cut the interest rate in the September meeting. Traders await the July Federal Open Market Committee (FOMC) Minutes meeting minutes on Wednesday.
The monetary policy in the US is imminently approaching its inflection point. The pace and number of rate cuts in this easing cycle will be data-dependent. The markets are now pricing in a nearly 67.5% odds of a 25 basis points (bps) Fed rate cut in its September meeting, down from 76% a day ago, according to the CME FedWatch Tool. The probability of a 50 basis points rate cut dropped to 32.5% from 53.0% last week.
On Tuesday, Fed Governor Michelle Bowman noted that she will remain cautious in her approach to any change in the policy stance. She further stated that overreacting to any single data point could jeopardize the progress already made. The Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday might offer more hints about further clues on the Fed’s plans. The rising bets of rate cuts and the dovish stance of the Fed are likely to undermine the USD against the Swiss Franc (CHF).
The Swiss National Bank (SNB) raised its policy rate to 1.75% before starting to cut its interest rate in March. A majority of economists surveyed by Bloomberg anticipated one more 25 bps cut in September, while traders are betting on more loosening. Meanwhile, the economic uncertainty and geopolitical tensions in the Middle East might boost the safe-haven flows, benefiting the Swiss Franc (CHF).
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.
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