- The US dollar/Swiss franc pair soared to nearly 0.8900 after the Swiss central bank cut its main borrowing rate by 50 basis points to 0.5%, in response to expectations for a 25 basis point rate cut.
- Swiss National Bank Governor Schlegel held off on the option of negative interest rates in his previous comments in November.
- The Fed's interest rate cut bets reach a threshold as US inflation is expected to rise.
USD/CHF remains close to 0.8900 for two weeks as Swiss Franc (CHF) plummets after Swiss National Bank (SNB) surprisingly cuts key borrowing rate by 50 basis points (bps) to 0.5% The price soared to an all-time high. This is the fourth consecutive interest rate cut by the Swiss central bank, but the first time it has cut rates more significantly than usual. The Swiss central bank was expected to cut interest rates, but at a slow pace of 25bps to 0.75%.
The Swiss central bank's rate cut expectations were based on highly dovish remarks by SNB Chairman Martin Schlegel at an event in Zurich in late November. “I would like to emphasize that lower interest rates and negative interest rates are not excluded from our toolbox,” Schlegel said.
Schlegel opted for a dovish statement on interest rate guidance, as inflationary pressures in the Swiss economy have remained in the desired range of 0-2% since June 2023. Switzerland's annual consumer price index (CPI) slowed to 0.6% in October.
Meanwhile, the US dollar (USD) has fallen slightly as traders are pricing in a 25bps interest rate cut by the Federal Reserve (Fed) to 4.25% to 4.50% at Wednesday's policy meeting. The US dollar index (DXY), which measures the value of the US dollar against six major currencies, has been steadily declining to around 106.50.
The Fed's dovish outlook strengthened after the release of November U.S. Consumer Price Index (CPI) data that showed a modest rise in rental prices. For the year, headline CPI and core CPI (net of volatile food and energy prices) rose in line with expectations of 2.7% and 3.3%, respectively.
Frequently asked questions about the Swiss Franc
The Swiss Franc (CHF) is the official currency of Switzerland. It is among the top 10 most traded currencies in the world, with trading volumes far exceeding the size of Switzerland's economy. Its value is determined by broad market sentiment, the country's economic situation, Swiss National Bank (SNB) actions, etc. From 2011 to 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was suddenly lifted, causing market turmoil as the value of the franc rose by more than 20%. Although the peg is no longer in place, Swiss franc assets tend to be highly correlated with euro assets due to the Swiss economy's high dependence on the neighboring euro zone.
The Swiss Franc (CHF) is considered a safe-haven asset, a currency that investors tend to buy in times of market stress. This is due to recognition of Switzerland's position in the world, whether it is a stable economy, a strong export sector, large central bank reserves or a long-standing political stance towards neutrality in global conflicts. currencies have become a good option for investors looking to escape risk. In times of turmoil, the value of the Swiss Franc may rise relative to other currencies that are considered to be a higher risk investment.
The Swiss National Bank (SNB) meets four times a year, fewer than other major central banks once a quarter, to decide on monetary policy. The bank aims to keep annual inflation below 2%. If inflation is above the target, or is expected to be above the target in the near future, the bank tries to control price increases by raising the policy interest rate. Higher interest rates are generally positive for the Swiss Franc (CHF), as they lead to higher yields and make the Swiss Franc (CHF) a more attractive place for investors. Conversely, when interest rates fall, the Swiss franc tends to fall.
The release of macroeconomic data in Switzerland is key to assessing the state of the economy and can influence the valuation of the Swiss Franc (CHF). Although the Swiss economy is generally stable, sudden changes in economic growth, inflation, the current account balance, or the central bank's foreign exchange reserves can cause fluctuations in the Swiss franc. Generally, high economic growth, low unemployment and high confidence are good for the Swiss Franc. Conversely, if economic indicators indicate weakening momentum, the Swiss franc is likely to weaken.
As a small and open economy, Switzerland is highly dependent on the health of the neighboring eurozone economy. The wider European Union is Switzerland's main economic partner and important political ally, so macroeconomic and monetary policy stability in the euro area is essential for Switzerland and therefore for the Swiss Franc (CHF). Due to this dependence, some models suggest that the correlation between the fortunes of the euro (EUR) and CHF is over 90%, or close to perfect.
