Why is the Swiss Franc struggling as Fed rate pause expectations weigh on the US Dollar?

The US Dollar came under pressure as September housing starts declined and pending home sales sank to record lows.
Oil gains following drone attacks in the Middle East and Ukraine stoked inflation and bets on a December Fed rate hike.
Carry trades supported by low Swiss interest rates prompt investors to sell the Franc and buy higher-yielding overseas assets.

Selling pressure keeps USD/CHF on course for a third straight day of losses, with the pair hovering near 0.8230 in Thursday’s Asian session. Weighing on the US Dollar (USD), recent economic releases have signalled weakness in the US economy: housing starts dropped in September, while pending home sales slipped to a record low.

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Markets remain uncertain after Fed Chair Kevin Warsh last week offered no guidance on whether further interest rate increases would be needed or when they might occur. Meanwhile, the CME FedWatch Tool shows traders assigning an 84% probability to the Fed leaving rates unchanged next week and a 90% chance of an increase in December.

Rising oil prices could nevertheless lend the Greenback support by heightening inflation concerns and strengthening expectations of a Federal Reserve (Fed) rate hike. Crude advanced after a drone strike on Saudi Aramco’s Shaybah oil field caused two casualties, escalating tensions in the Middle East and fuelling fears of possible disruptions to energy supplies. Ukraine also launched large-scale drone attacks on key Russian oil infrastructure this week. The strikes signalled Kyiv’s intention to obstruct Moscow’s planned increase in diesel exports under a recent agreement between Presidents Trump and Putin.

Persistent pressure on the Swiss Franc (CHF), however, may restrict further declines in USD/CHF. A widening gap between interest rates in the United States and Switzerland, together with increasing carry-trade-related selling, is the main driver of the Franc’s weakness.

The Franc (CHF) has become increasingly appealing as a funding currency, with markets expecting US borrowing costs to remain high while Swiss interest rates stay among the world’s lowest. Investors are consequently borrowing in Francs and selling the currency to shift into higher-yielding assets, maintaining downward pressure on the Franc.

Swiss Franc: Frequently Asked Questions

Which factors shape the Swiss Franc’s value?

Among the world’s ten most actively traded currencies, the Swiss Franc (CHF) is Switzerland’s official currency, with trading volumes far exceeding the size of the country’s economy. Broad market sentiment, domestic economic conditions and Swiss National Bank (SNB) decisions are among the influences on its value. From 2011 to 2015, the Franc was pegged to the Euro (EUR). The sudden removal of that peg sent the Franc more than 20% higher and triggered market turmoil. Although the peg no longer applies, movements in CHF remain closely linked to those in the Euro because Switzerland’s economy relies heavily on the neighbouring Eurozone.

What gives the Swiss Franc its safe-haven status?

During periods of market stress, investors tend to buy the Swiss Franc (CHF), giving it the status of a safe-haven asset. This appeal rests on perceptions of Switzerland’s stability: its resilient economy, strong export sector, sizeable central bank reserves and long-established neutrality in global conflicts 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.

How can Swiss National Bank decisions move the Franc?

Monetary policy is decided by the Swiss National Bank (SNB) at four meetings each year, one per quarter, a lower frequency than at other major central banks. Its objective is an annual inflation rate below 2%. If inflation exceeds the target, or is expected to do so in the foreseeable future, the SNB will seek to curb price increases by raising its policy rate. Such increases usually support the Swiss Franc (CHF): higher yields make Switzerland more appealing to investors. Rate cuts, by contrast, generally put downward pressure on CHF.

What role do economic releases play in Swiss Franc movements?

The Swiss Franc’s (CHF) valuation can shift in response to Swiss macroeconomic releases, which provide important insights into the economy’s condition. Although Switzerland’s economy is generally stable, abrupt changes in growth, inflation, the current account or the central bank’s currency reserves can move CHF. Strong growth, low unemployment and robust confidence typically support the currency. Data signalling a loss of economic momentum, on the other hand, is likely to leave CHF weaker.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland’s small, open economy depends heavily on economic conditions across the neighbouring Eurozone. Its principal economic partner and an important political ally is the wider European Union. Stability in the Eurozone’s macroeconomic environment and monetary policy is therefore crucial for Switzerland and, in turn, the Swiss Franc (CHF). Reflecting this dependence, some models put the correlation between movements in the Euro (EUR) and CHF at more than 90%, approaching a perfect correlation.