Swiss Franc trades weaker against backdrop of Fed-SNB interest rate gap

• December Fed rate hike expectations underpin a steady US Dollar as USD/CHF advances.
• Nearly 85.5% odds of a 25-basis-point rate hike in December are priced in by traders, according to CME FedWatch.
• Borrowing costs of 0% encourage carry-trade selling, while eurozone debt concerns and AI risks prompt safe-haven purchases and the unwinding of positions.

Expectations of another Fed rate hike, which would widen the interest rate gap between the United States (US) and Switzerland further, are supporting USD/CHF. Trading near 0.8360 in Friday’s Asian session, the pair is extending its gains for a fourth successive day.

US Consumer Price Index (CPI) figures released earlier this week exceeded expectations, strengthening forecasts that the Federal Reserve will raise rates in December. Those expectations gained particular support after Fed Governor Christopher Waller said a 50-basis-point increase should be considered if core inflation remains elevated. Against this backdrop, persistent inflation worries and expectations of tighter monetary policy are keeping the US Dollar (USD) steady.

According to the CME FedWatch tool, traders now assign nearly 85.5% odds to a Fed rate hike at the central bank’s next meeting on 8-9 December, with a 14.5% probability attached to a half-point increase. Attention is shifting to Friday’s US Producer Price Index (PPI) release for further clues to the central bank’s rate trajectory. October headline PPI is expected to increase by 6.6% year-on-year, while the core measure is forecast to rise by 5.0%.

Swiss borrowing costs are expected to remain at 0%, the lowest level worldwide, encouraging investors to fund carry trades in the Swiss Franc (CHF). Selling the franc to invest in higher-yielding assets overseas puts the currency under downward pressure. Yet concerns over a eurozone sovereign debt crisis and AI-related market risks have revived demand for safe havens, eroding carry trade returns. Investors are consequently closing these positions, putting upward pressure on the franc in turn.

Despite adopting a softer tone on currency intervention, the Swiss National Bank (SNB) remains ready to act if necessary to restrain any sharp appreciation, officials reaffirmed to lawmakers on Wednesday.