USD/CHF appreciates above 0.8650 ahead of Swiss Trade Balance data

• USD/CHF gains ground as recent US data have tempered the odds of more bumper rate cuts by the Fed.
• Improved US Treasury yields contribute support to strengthen the Greenback.
• The downside of the Swiss Franc could be restrained due to safe-haven flows amid rising Middle-East tensions.

USD/CHF extends its gains for the second successive day, hovering around 0.8660 during the Asian trading hours on Thursday. The US Dollar (USD) gains ground as strong labor and inflation data has tempered expectations for aggressive easing by the Federal Reserve (Fed). According to the CME FedWatch Tool, there is currently a 92.1% probability of a 25-basis-point rate cut in November, with no expectation of a larger 50-basis-point reduction.

The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, continues its winning streak for the fifth consecutive session, bolstered by the improved US Treasury yields after two days of losses. The DXY trades around 103.60, maintaining its position near two-month highs with 2-year and 10-year yields on US Treasury bonds standing at 3.94% and 4.03%, respectively, at the time of writing.

The downside of the Swiss Franc (CHF) could be limited due to safe-haven flows amid rising tensions in the Middle East. On Wednesday, Israel intensified its airstrikes on Lebanon, including an attack that destroyed the municipal headquarters of a major town, resulting in the deaths of 16 individuals, including the mayor. This marks the largest assault on an official Lebanese state building since the onset of the Israeli air campaign, according to Reuters.

The Swiss inflation rate fell to 0.8% in September, marking a three-year low and raising the probability of another 25-basis-point rate cut by the Swiss National Bank (SNB) in December. In September, the SNB had already reduced its key policy rate by 25 basis points to 1%, representing the third consecutive cut and bringing borrowing costs to their lowest level since early 2023.

Traders will likely observe Swiss Trade Balance data scheduled to be released on Thursday. The focus will shift to the US Retail Sales data, set to be released later in the North American session. Expectations are for monthly consumer spending in the United States to increase by 0.3% in September, up from 0.1% in the previous reading.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

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.

Why is the Swiss Franc considered a safe-haven currency?

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.

How do decisions of the Swiss National Bank impact the Swiss Franc?

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.

How does economic data influence the value of the Swiss Franc?

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.

How does the Eurozone monetary policy affect the Swiss Franc?

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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