Swiss Franc weakens ahead of next week’s Fed interest rate decision

One-month low gives way to a USD/CHF rebound as the US Dollar and Treasury yields recover.
The Swiss Franc remains under pressure from the interest rate differential between the Fed and SNB.
Next week's Fed decision is in focus as traders seek further guidance on the interest rate outlook.

USD/CHF trades near 0.8250 at the time of writing. The pair is up 0.56% on Friday, recovering the previous day’s losses as the US Dollar (USD) and US Treasury yields regain ground. On Thursday, it had dropped to a one-month low of 0.8191.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Concerns about the sustainability of AI-related investments hit equities on Thursday, prompting defensive flows into the Swiss Franc (CHF). Demand for government bonds also increased. This drove US Treasury yields sharply lower and put further pressure on the Greenback.

Friday sees that move fade. After a 16.6 basis-point decline to 4.95% the previous day, the benchmark 10-year US Treasury yield is recovering towards 5%. The US Dollar Index (DXY) is trading near 101.75, having reached a three-week low of 101.45 on Thursday. The index measures the Greenback against a basket of six major currencies.

The latest US economic releases send mixed signals. October’s preliminary S&P Global Composite Purchasing Managers’ Index (PMI) slipped to 57.6, down from September’s 58.4. Manufacturing edged up from 55.9 to 56.0, exceeding the 55.6 forecast. Services, by contrast, eased from 58.8 to 57.9, in line with expectations. The final University of Michigan Consumer Sentiment Index was revised higher, from 46.3 to 48.0. Inflation expectations were unchanged at 4.7% for the 1-year horizon and 3.5% for the 5-year horizon.

Next week’s interest rate decision from the Federal Reserve (Fed) is now the main focus. Following September’s 25 bps increase, the central bank is widely expected to leave rates unchanged. A further rise before year-end remains possible, however. Higher energy prices associated with Middle East tensions risk keeping inflation above central banks’ 2% target for longer.

With the SNB holding its policy rate at 0%, the sizeable interest rate differential with the Fed leaves the Swiss Franc exposed. Minutes of the SNB’s September meeting, published on Thursday, indicated little urgency to tighten. They stated that “the Governing Board deemed current monetary conditions appropriate to ensure price stability over the medium term.”

On the outlook, policymakers said that “inflation is likely to increase again somewhat in the short term due to higher energy prices,” and added that “an increased willingness to intervene in foreign exchange markets is no longer necessary in the current environment.”

SNB: Key Questions

Swiss National Bank: Role and Mandate

Switzerland’s central bank, the Swiss National Bank (SNB), operates independently with a mandate to safeguard price stability over the medium and long term. It defines price stability as an annual increase of less than 2% in the Swiss Consumer Price Index (CPI). To meet that objective, the SNB seeks to keep monetary conditions appropriate. Those conditions are determined by interest rate levels and exchange rates.

Swiss Franc: The Impact of SNB Interest Rate Policy

Guided by its price stability objective, the Swiss National Bank (SNB) Governing Board sets the policy rate at the level it considers appropriate. If inflation exceeds its target, or is forecast to do so in the foreseeable future, the bank will raise the policy rate to curb excessive price increases. The resulting higher yields generally support the Swiss Franc (CHF), as they make Switzerland more attractive to investors. Lower interest rates, conversely, tend to put downward pressure on CHF.

SNB Foreign Exchange Intervention: Approach and Rationale

The Swiss National Bank (SNB) regularly intervenes in foreign exchange markets to prevent excessive appreciation of the Swiss Franc (CHF) against other currencies. A stronger CHF undermines the competitiveness of Switzerland’s substantial export sector. From 2011 to 2015, the SNB maintained a peg to the Euro to restrain the Franc’s gains against it. Intervention draws on the bank’s large foreign exchange reserves and typically involves purchases of currencies such as the US Dollar or the Euro. When inflation is high, especially because of energy costs, the SNB holds back from intervention. A strong CHF lowers the cost of energy imports, softening the price shock for Swiss households and businesses.

SNB Governing Council: Monetary Policy Decision Schedule

Monetary policy assessments take place at the SNB’s quarterly meetings in March, June, September and December. Every assessment produces a monetary policy decision, accompanied by the publication of a medium-term inflation forecast.