Swiss Franc Slides to Fresh Monthly Lows as Hawkish Fed and Higher US Yields Weigh

0.8368 marks a fresh one-month high for USD/CHF. The pair is heading for its biggest weekly gain in two years.
Broad US Dollar gains reflect growing expectations of an outsized Fed rate increase in December.
0.8400 is the pivotal USD/CHF level highlighted by ING experts.

0.8368 is USD/CHF’s session high so far on Friday. The pair has advanced for a fourth straight day and is set for its strongest weekly performance in two years. Higher US Treasury yields are supporting the US Dollar (USD) against the Swiss Franc (CHF), with Federal Reserve (Fed) officials signalling scope for a 50-basis-point rate increase in December.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Speculators have increased their long US Dollar positions this week. The catalyst was Tuesday’s stronger-than-expected Consumer Price Index (CPI) data, which led Federal Reserve (Fed) officials to raise the prospect of an outsized December rate increase.

On Monday, Fed Governor Christopher Waller said an October consumer inflation reading of 0.3% or higher would mean that “hiking only 25 basis points would put our credibility at risk”. The eventual CPI increase was 0.4% in October. Dallas Fed President Lorie Logan echoed that position a few days later, stating that “the FOMC needs to implement at least two more 25-basis-point rate increases.”

0.8400 in focus for USD/CHF as Dollar gains weigh on Franc and Yen

13% is now the market-implied probability of a larger Fed move in December, up from none one week earlier, according to the CME’s FedWatch Tool. Against that backdrop, the US two-year Treasury yield has climbed about 32 basis points this week. The benchmark 10-year yield has risen 27 basis points to move back above 5%. These moves have fuelled sharp US Dollar gains against most of its peers.

In their assessment of the pressure on the two currencies, ING analysts note that "the low-yielding Swiss franc and the Yen have some of the highest correlations with US rates and are under pressure."

ING experts set out the significance of resistance in a note: "0.8400 is a really important resistance area for USD/CHF and will probably help determine whether the dollar needs to take another big leg higher over the coming weeks,"

0.9% was Switzerland’s annual Producer Price Index (PPI) inflation rate in October, according to figures published earlier on Friday. That marked an acceleration from 0.3% in September, rather than the modest slowdown to 0.2% expected by markets. Monthly PPI rose to 0.9%, largely reversing September’s 0.2% decline. Despite the figures, the prevailing view remains that the Swiss National Bank (SNB) will leave monetary policy unchanged in the near term.

Swiss Franc: key questions answered

Swiss Franc drivers: sentiment, the economy and policy

Among the world’s top ten most actively traded currencies, the Swiss Franc (CHF) is Switzerland’s official currency. Trading volumes far exceed the size of the Swiss economy. Factors shaping its value include overall market sentiment, domestic economic conditions and Swiss National Bank (SNB) decisions. From 2011 to 2015, the currency was pegged to the Euro (EUR). The abrupt removal of that peg drove the Franc more than 20% higher and unsettled markets. Although the peg no longer applies, the Swiss economy’s heavy reliance on the neighbouring Eurozone means CHF movements still tend to track those of the Euro closely.

Swiss Franc safe-haven status: the factors behind demand

During periods of market stress, investors tend to buy the Swiss Franc (CHF), giving it safe-haven status. That appeal reflects perceptions of Switzerland’s stable economy, robust export sector, substantial central bank reserves and longstanding political neutrality in global conflicts. Together, these characteristics make its currency attractive to investors seeking to avoid risk. In turbulent markets, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

Below 2% inflation: SNB policy and the Swiss Franc

Four monetary policy meetings are held each year by the Swiss National Bank (SNB), one per quarter, making its meeting schedule less frequent than those of other major central banks. Its objective is annual inflation below 2%. If inflation exceeds that target, or is projected to do so in the foreseeable future, the SNB will seek to curb price pressures by increasing its policy rate. Higher rates typically support the Swiss Franc (CHF): the resulting rise in yields enhances Switzerland’s appeal to investors. Lower rates, by contrast, generally weigh on CHF.

Swiss economic data: implications for the Franc

Assessments of Switzerland’s economy rely heavily on macroeconomic releases, which can also shift the Swiss Franc’s (CHF) valuation. Although the economy is generally stable, abrupt changes in growth, inflation, the current account or central bank currency reserves can move CHF. Strong growth, low unemployment and elevated confidence usually support the currency. Data signalling a loss of economic momentum, however, are likely to weaken it.

Over 90% correlation: the Eurozone’s influence on the Swiss Franc

More than 90%, or nearly perfect, is the correlation some models suggest between the fortunes of the Euro (EUR) and the Swiss Franc (CHF). This close relationship reflects Switzerland’s position as a small, open economy that relies heavily on the health of its Eurozone neighbours. The wider European Union is both its principal economic partner and an important political ally. Stability in Eurozone macroeconomic conditions and monetary policy is consequently critical to Switzerland and its currency.