USD/CHF loses momentum below 0.8100 despite hopes for a Russia-Ukraine peace deal
- USD/CHF loses traction to around 0.8070 in Tuesday’s early European session.
- Hopes for a Russia-Ukraine peace deal might weigh on the Swiss Franc, a safe-haven currency.
- Hot US wholesale prices last month dimmed the prospect of an oversized 50 bps Fed rate cut.
The USD/CHF pair tumbles to near 0.8070 during the early European session on Tuesday. However, the potential downside for the pair might be limited amid optimism of a truce in the conflict between Russia and Ukraine, with US President Donald Trump planning a summit meeting between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskiy very soon.
Trump said on Monday that the United States (US) would help guarantee Ukraine's security in any deal to end the war with Russia. The "Coalition of the Willing" of 30 nations reached an agreement to provide security assurances for Ukraine and coordinate actions with the US.
Trump is planning a meeting between Zelenskiy and Putin after a conference with European leaders on Monday. Trump said he discussed the plan with Putin in a call during his negotiations with the European leaders. Optimism surrounding Russia-Ukraine talks could dampen the safe-haven demand and weigh on the Swiss Franc (CHF).
Nonetheless, a jump in US wholesale prices last month and a solid increase in July's Retail Sales figures diminish the odds for a more aggressive policy easing by the Fed, which could underpin the Greenback in the near term. Fed fund futures traders are now pricing in an 83% possibility of a September Fed rate cut, after last week briefly fully pricing in a move, according to the CME FedWatch tool.
Traders will take more cues from the Fed's annual Jackson Hole conference later on Friday, as it might offer some insight about the US economic outlook and interest rate path. Any dovish remarks from Fed officials could drag the USD lower in the near term.
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.