On Thursday, the Swiss franc showed surprising strength, even though the morning’s inflation figures were lower than anticipated. Traditionally, a weaker franc is expected, but on this day, it emerged as the strongest currency, gaining against all major competitors. The consumer price index (CPI) had only a slight rise of 0.2% for May, which was below the 0.3% forecast, while the annual rate stood at 0.6%, rather than the expected 0.8%. Generally, central banks want to avoid currency auctions during such instances of subdued inflation. Still, the market remained unfazed.
Currencies That Defy Logic
The visuals speak louder than statistics. Before the inflation announcement at 06:30 GMT, USD/CHF had already dropped to around 0.7850 from an overnight high of about 0.7950. Surprisingly, this dip in CPI seemed to bolster the US dollar initially. After hitting lows near 0.7850, it rebounded towards 0.7900 shortly thereafter. The franc had already done the hard work before the numbers were out, leaving minimal impact from the anticipated disinflation. When a currency increases ahead of a policy decision that undermines its own fundamentals, it suggests influences that the official explanation doesn’t quite capture.
A Story Worth Telling
This isn’t just about the franc. A significant part of its strength came from the US dollar’s decline, despite a week where Federal Reserve officials hinted at no interest rate cuts. Some weaker data caused a shift in trader sentiment. Initial jobless claims rose to 225,000 against a predicted 213,000, and both productivity and labor costs were less favorable than expected for the first quarter. With nonfarm payrolls (NFP) on the horizon, traders became more cautious and reduced their long positions on the dollar. So, when you strip it down, the franc’s strength is more about the dollar’s weakness than anything else.
The Preferred Safe Haven
On Thursday, the franc outshined other currencies, including the yen. In times where safe havens diverge, the market evaluates credibility, and right now, the franc is ahead. The absence of a Bank of Japan (BoJ) normalization expectation, along with a lack of political instability or major issues, positions the franc as the go-to option. As tensions in the Middle East, particularly around the Strait of Hormuz, continue to grab headlines, the franc is sought after like an emergency reserve.
SNB’s Paradox
There’s a real contradiction at play here. The Swiss National Bank (SNB) is actively trying to avoid a consistently strong franc. With the policy rate already at 0%, inflation flirting with the lower limit, and a preference for market interventions rather than returning rates to negative territory, Thursday’s weak CPI offers new arguments for a dovish stance ahead of the June policy meeting. Ironically, however, the market responded by purchasing more francs, almost suggesting they didn’t buy the SNB’s position. The currency seems to be moving in a direction that the Swiss central bank finds challenging to manage, especially on a day that should have supported their case.
Trade Insights
Structurally, USD/CHF is trading above the 50-period exponential moving average (EMA) around 0.7850 but remains bounded by the 200 EMA at about 0.7950, with 0.7900 acting as a daily pivot. The Daily Stochastic Relative Strength Index (Stoch RSI) indicates a decline in the dollar’s momentum. A decisive drop below 0.7850 could signal renewed strength for the franc, potentially increasing the risk of SNB intervention. Although the sentiment remains positive for the franc as risk aversion persists, the trading dynamics are somewhat uneven. As USD/CHF approaches its lows, the likelihood of intervention grows, which could cap any further gains.
What Matters on Friday
The verdict will come at 12:30 PM Japan time on Friday, when the NFP report for May is predicted to show around 85,000 jobs, a decrease from the previous 115,000 estimate, with the unemployment rate at 4.3%. A weak report could extend the franc’s rise against the dollar, pushing USD/CHF back towards and potentially below 0.7850. Conversely, a stronger report might reverse this trend, pushing the pair up to the 200 EMA around 0.7950. The average hourly wage will also be closely watched, as a dovish outlook on the dollar means that the bar for disappointments is relatively low.
