USD/CHF moves back above 0.8900 mark; upside potential seems limited
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Haresh Menghani
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06 Mar @ 05:56 (GMT+0)

USD/CHF moves back above 0.8900 mark; upside potential seems limited

  • USD/CHF attracts buyers for the second straight day, though it lacks bullish conviction.
  • A positive risk tone is seen undermining the safe-haven CHF and lending some support.
  • Fed rate cut bets keep the USD bulls on the defensive and cap the upside for the major.

The USD/CHF pair builds on the previous day's modest bounce from the vicinity of mid-0.8800s, or the lowest since December 12, and gains some follow-through positive traction for the second straight day on Thursday. Spot prices climb back above the 0.8900 mark during the Asian session, though any meaningful appreciating move seems elusive amid the bearish sentiment surrounding the US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, dives to a four-month low amid bets that the Federal Reserve (Fed) would cut interest rates multiple times this year. The expectations were further fueled by the disappointing release of the US ADP report on Wednesday, which showed that private-sector employers added only 77K jobs in February. This comes on top of worries that US President Donald Trump's trade tariffs might trigger a sharp slowdown in the US economy and continue to weigh on the buck.

That said, a goodish rebound in the US Treasury bond yields helps limit any further USD losses. Apart from this, a positive tone around the equity markets is seen undermining the safe-haven Swiss Franc (CHF) and lending some support to the USD/CHF pair. However, it will still be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for further gains. Traders might also opt to wait on the sidelines ahead of the release of the US Nonfarm Payrolls (NFP) report on Friday.

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.