Swiss Franc declines as safe-haven demand supports US Dollar
- USD/CHF rises as safe-haven US Dollar demand grows amid heightened US-Iran conflict and Strait of Hormuz tensions.
- July's surprise 23,000 US payroll drop and past revision signal a cooling labor market, dampening Fed rate expectations.
- As July Swiss inflation cooled to 0.4%, the SNB is expected to keep rates steady, holding cuts as backup.
USD/CHF inches higher after registering over 0.5% losses in the previous trading day, hovering around 0.8090 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) gains on rising safe-haven demand amid geopolitical tensions remaining high as the ongoing United States (US)-Iran conflict enters a critical diplomatic phase, with intense military engagements and strategic pressure surrounding the Strait of Hormuz driving market caution.
Iran stated that talks with Oman to establish a safe shipping route through the strategic waterway are nearing an agreement, though Tehran cautioned that any deal would not result in an immediate reopening.
Meanwhile, Iran-backed Houthi militants in Yemen claimed a recent attack on Saudi Arabia’s Jazan refinery, and a tanker operated by the Abu Dhabi National Oil Co. came under attack in the Strait. Tehran rejected direct negotiations with the United States (US) for now, citing alleged breaches of the interim peace deal reached in June. Despite mounting pressure on the US administration to resolve with Tehran, President Donald Trump signaled patience regarding the negotiations.
Nonfarm Payrolls (NFP) unexpectedly dropped by 23,000 in July, while sharp downward revisions to 20,000 from the previous 57,000 in June highlighted weakening labor market conditions. CME FedWatch Tool suggests that markets now see around a 46% probability of a 25-basis-point rate hike in September, down from 67% a week earlier. Investors are now focused on upcoming inflation reports for further clues on monetary policy.
Swiss inflation slowed to a four-month low of 0.4% year-over-year (YoY) in July, down from 0.5% prior, demonstrating minimal pass-through from geopolitical energy price shocks. The drop defied the Swiss National Bank's (SNB) forecasts for a mild inflationary bump following its decision to hold policy rates at 0%. Looking ahead, the SNB is anticipated to maintain steady rates through year-end, viewing further cuts as a backup plan rather than the baseline, supported by a resilient banking sector.
Franc stays on the back foot as SNB tolerates weaker currency
Analysts at OCBC highlight that the Swiss Franc “remains under pressure as carry trade funding demand grows and the SNB appears comfortable with a weaker currency.” They note that with “inflation subdued and policy rates likely anchored at zero,” the backdrop favours continued softness in the currency, and that “CHF weakness could persist into year-end.”
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.