USD/CHF extends decline near 0.8400 as investors brace for US GDP data
- USD/CHF extends its downside around 0.8405 in Thursday’s early European session.
- Fed’s dovish stance and escalating Middle East geopolitical tensions weigh on the pair.
- The Swiss ZEW Survey Expectations came in at -3.4% in August vs. 9.4% prior.
The USD/CHF pair remains under selling pressure near 0.8405 during the early European trading hours on Thursday. The dovish remarks from US Federal Reserve (Fed) officials continue to undermine the US Dollar (USD).
The Fed Chair Jerome Powell said at the Fed’s annual retreat at Jackson Hole last week that “the time has come” for the US central bank to cut interest rates. According to the CME FedWatch Tool, financial markets are now fully priced in a 25 basis points (bps) rate cut in September, but the chance of a deeper rate cut stands at 36.5%.
Meanwhile, San Francisco Fed president Mary Daly said on Monday that "the direction of change is down, and the time to adjust is now.” Traders widely expect the Fed to move ahead with a rate cut in September, which is likely to drag the Greenback lower in the near term. Minneapolis Fed Neel Kashkari noted it was appropriate to discuss potentially cutting interest rates from as early as September due to a weakening labor market.
Meanwhile, the rising geopolitical tensions in the Middle East and economic uncertainties might boost the safe-haven demand, which benefits the currency like the Swiss Franc (CHF) against the USD. Israel's military launched raids and airstrikes in several parts of the occupied West Bank early Wednesday, killing at least 11 Palestinians in an offensive Israel says is its most expansive in years, per CNN.
Data released by the Centre for European Economic Research showed on Wednesday that Switzerland’s ZEW Survey Expectations came in at -3.4% in August from 9.4% in the previous reading. On Friday, the Swiss KOF Leading Indicator for August will be published. On the US docket, the US GDP Annualized is due on Thursday, which is projected to expand by 2.8% in Q2 in the second estimate.
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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