USD/CHF rises above 0.8450 despite improved Swiss Real Retail Sales

• USD/CHF advances due to the waning likelihood of more bumper Fed rate cuts.
• CME FedWatch Tool indicates a 38.2% probability of a 50 basis point rate hike, down from 53.3% the previous day.
• Swiss Real Retail Sales increased by 3.2% YoY, marking the strongest growth since February 2022.

USD/CHF extends its gains for the second successive day, trading around 0.8470 during the early European hours on Tuesday. This upside of the USD/CHF pair is attributed to the latest speech from the Federal Reserve (Fed) Chairman Jerome Powell.

Fed Chair Powell said the central bank is not in a hurry and will lower its benchmark rate ‘over time.’ Fed Chair Powell added that the recent 50 basis point interest rate cut should not be seen as an indication of similarly aggressive future actions, noting that upcoming rate changes are likely to be more modest.

The CME FedWatch Tool indicates that markets are assigning a 61.8% probability to a 25 basis point rate cut by the Federal Reserve in November, while the likelihood of a 50 basis point is 38.2%, down from 53.3% a day ago.

Switzerland's economic indicators have been showing positive momentum recently. In August, Real Retail Sales rose by 3.2% year-on-year, surpassing the expected 2.6% increase. This is the strongest growth since February 2022 and reflects an upwardly revised gain of 2.9% in July. The boost in retail sales highlights increasing consumer spending, which is a vital driver for the economy.

On Monday, the KOF Leading Indicator for September also pointed to a brighter economic outlook, with a reading of 105.5, up from 105.0 in August. This exceeded market expectations of 102.0, signaling a continuation of the recovery seen in recent months. The steady improvement in this indicator, suggests that Switzerland's economy is on a positive trajectory, supported by both consumer activity and broader economic factors.

In September, the Swiss National Bank (SNB) reduced its key interest rate by 25 basis points (bps) for the third consecutive time. The move came as part of the SNB's ongoing efforts to maintain price stability and mitigate the impact of the strong Swiss Franc (CHF), which has posed challenges for exporters.

The SNB also signaled its readiness to further cut interest rates if needed, indicating a proactive approach to ensuring that the economy remains on track. By keeping borrowing costs lower, the SNB aims to encourage spending and investment, while also managing the exchange rate to protect the competitiveness of Swiss goods and services.

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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