The USD/CHF pair slumps to near 0.7930, the lowest since June 5, during the early European trading hours on Monday. The US Dollar (USD) weakens against the Swiss Franc (CHF) after the US and Iran announced a framework deal for peace. Traders brace for the US Federal Reserve (Fed) interest rate decision later on Wednesday.
US President Donald Trump on Sunday announced a “great deal” to end the war with Iran.Iran’s National Security Council stated that the US naval blockade will be lifted immediately and the war will end on all fronts, including Lebanon. Pakistan’s Prime Minister Shehbaz Sharif said that the official signing ceremony for the “peace deal” will take place on Friday in Switzerland. Signs of progress in the US-Iran peace agreement boost the CHF and create a headwind for the pair.
The US central bank is set to keep its benchmark interest rate unchanged at a target range of 3.50% to 3.75% at its upcoming policy meeting on Wednesday. Traders will closely monitor the press conference and take more cues about how new Fed chair Kevin Warsh will lead the US central bank into its next era. Any hawkish remarks from Fed officials could lift the Greenback and act as a headwind for the major pair.
Markets have priced in nearly a 64% chance of a Fed interest rate hike in December this year after the peace deal, down from 69% last week, according to theCME FedWatch tool.
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.
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