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The Swiss Franc edges lower against the US Dollar on the back of relatively low inflation in Switzerland, which indicates interest rates remaining low.
SNB’s Jordan says Swiss Franc rising in real terms is hurting Swiss exporters, SNB unlikely to pursue CHF-strengthening policies.
USD/CHF hits resistance at falling trendline, 50-week SMA.
The Swiss Franc (CHF) edges lower against the US Dollar (USD) on Wednesday as traders continue to bet on a less-inflationary outlook for Switzerland, supporting a relatively low interest rate policy and dampening foreign capital inflows.
Inflation figures from Switzerland’s Federal Statistics Office released on Monday showed prices rising 1.2% in February, down from the 1.3% increase in January. Whilst not as low as the 1.1% forecast by economists, the data extended the trend lower in inflation, and positions the neutral country as one of the least inflationary in the western world.
Declining inflation suggests the Swiss National Bank (SNB) will not have to raise base interest rates from the current 1.75% level in order to combat inflation, which in turn is likely to lower demand for the Swiss Franc from foreign investors seeking to park their capital where it can reap the highest return.
In an interview with Bloomberg in February, the president of the Swiss National Bank, Thomas Jordan, said the Swiss Franc had been rising in nominal terms for several years, and that this had been “helpful”, as it has “shielded us from inflationary pressures from abroad.” Jordan added, however, that at the end of 2023 the Franc had started to rise in real terms, and that this was now a problem for Swiss businesses, many of whom are exporters.
His comments suggest the SNB is unlikely to introduce policy changes that will further appreciate the Swiss Franc, chief amongst them the elevation of interest rates.
The next key event for the USD/CHF is likely to be one that moves the US Dollar. The testimony of Federal Reserve chairman Jerome Powell before the US Congress on Wednesday at 15:00 GMT could impact USD.
The Federal Reserve is currently expected to cut interest rates sometime in the summer, possibly in June. A run of poor macroeconomic data over the past few days increases that possibility. Traders will be watching the Fed Chair’s speech, therefore, for any hints the Fed is more closely aligning to a definite time line for lowering interest rates or even a set date.
If Powell intimates cuts are coming – either sooner than foreseen or in June – this could have a dramatic impact on the US Dollar, weakening it against most counterparts.
The USD/CHF – the number of Swiss Francs one US Dollar can buy – bumps up against a key technical level on the charts which could mark a possible reversal point back down in line with the long-term downtrend.
The weekly chart below shows the price currently butting up against the falling trendline of a descending channel, as well as the key 50-week Simple Moving Average (SMA). It is possible this could mark the inflection point of a reversal where the pair starts moving down again within the falling channel.
US Dollar vs Swiss Franc: weekly chart
The daily chart below shows a bearish divergence between price at the two peaks on February 14 and March 3. Although the March high was higher than the February high, the Moving Average Convergence/Divergence indicator (MACD) failed to make a higher high to match, suggesting waning strength in the up move. This could further indicate the possibility of a reversal back down being on the cards.
It is also possible to see a possible topping pattern taking shape during late February and early March, perhaps a kind of bearish Double Top, further adding credence to the possibility of a reversal.
US Dollar vs Swiss Franc: 1-day chart
The Shooting Star Japanese candlestick pattern on March 3 is another bearish indicator.
Nevertheless, price has not yet started to reverse and there is still a possibility it could continue higher. A break above the high of the Shooting Star at 0.8892 would indicate a continuation of the short-term uptrend to a possible target at 0.9056.
For confirmation of a reversal back down, on the other hand, price should break below the February 22 low of 0.8742, leading to a likely decline to 0.8645.
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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