Swiss Franc faces headwinds as Fed rate pause expectations weigh on US Dollar

US pending home sales reached record lows. A decline in September housing starts added to pressure on the US Dollar.
Oil prices climbed after drone attacks in the Middle East and Ukraine, stoking inflation and bets on a December Fed rate increase.
Switzerland’s low interest rates encourage carry trades, with investors selling the Franc to buy higher-yielding overseas assets.

USD/CHF trades near 0.8230. The pair is down for a third straight day during Thursday’s Asian session as weak US economic data weigh on the US Dollar (USD). September housing starts declined, while pending home sales reached a record low, signalling weakness in the US economy.

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

An 84% probability of unchanged Fed interest rates next week is priced into markets, according to the CME FedWatch Tool. Traders also assign a 90% chance to a December rate increase. The outlook remains uncertain, however, after Fed Chair Kevin Warsh declined last week to indicate when further interest rate rises might occur or whether they would be needed.

Rising oil prices could nevertheless underpin the Greenback by heightening inflation concerns and expectations of a Federal Reserve (Fed) rate increase. Crude advanced after a drone attack on Saudi Aramco’s Shaybah oil field caused two casualties. The attack escalated geopolitical tensions in the Middle East and concerns about possible disruptions to energy supplies. Meanwhile, Ukraine launched large-scale drone attacks on critical Russian oil infrastructure this week. These strikes signalled Kyiv’s intention to obstruct Moscow’s planned expansion of diesel exports under a recent agreement between Presidents Trump and Putin.

Persistent pressure on the Swiss Franc (CHF) may restrict further USD/CHF losses. A widening gap between United States and Swiss interest rates is the main driver of Franc weakness, compounded by increasing carry-trade selling.

With US borrowing costs expected by markets to remain high and Swiss rates among the world’s lowest, the Franc (CHF) has become increasingly attractive as a funding currency. Investors consequently borrow in Francs, then sell the currency to acquire higher-yielding assets. This maintains downward pressure on the Franc.

Swiss Franc: Key Questions

Swiss Franc: Main Market Drivers

Switzerland’s official currency, the Swiss Franc (CHF), ranks among the world’s top ten most actively traded currencies. Trading volumes far exceed the size of the Swiss economy. Broader market sentiment, domestic economic conditions and Swiss National Bank (SNB) actions are among the factors shaping its value. From 2011 to 2015, the Franc was pegged to the Euro (EUR). The abrupt removal of that peg sent the Franc more than 20% higher and triggered market turmoil. Although the peg no longer applies, CHF movements remain closely linked to those of the Euro, reflecting Switzerland’s heavy economic reliance on the neighbouring Eurozone.

Swiss Franc: The Safe-Haven Appeal

Investors often buy the Swiss Franc (CHF) during periods of market stress, giving it safe-haven status. That appeal reflects Switzerland’s perceived strengths: economic stability, a strong export sector, substantial central bank reserves and a longstanding policy of neutrality in international conflicts. These characteristics make its currency attractive to investors seeking to avoid risk. During turbulent periods, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

Swiss National Bank Decisions and the Franc

Monetary policy is set by the Swiss National Bank (SNB) at four meetings each year, one per quarter, a less frequent schedule than at other major central banks. Its objective is annual inflation below 2%. If inflation exceeds that target, or is forecast to do so in the foreseeable future, the bank will seek to curb price growth through an increase in its policy rate. Rising interest rates generally support the Swiss Franc (CHF): higher yields make Switzerland more attractive to investors. Rate reductions, by contrast, typically weaken CHF.

Swiss Economic Data and the Franc’s Value

Swiss macroeconomic releases help investors assess economic conditions and can alter the Swiss Franc’s (CHF) valuation. Despite the economy’s general stability, abrupt shifts in growth, inflation, the current account or central bank currency reserves can move CHF. Strong growth, low unemployment and robust confidence usually support the currency. Signs of weakening economic momentum, however, make CHF depreciation more likely.

Eurozone Monetary Policy and the Swiss Franc

Switzerland’s small, open economy relies heavily on the economic health of its Eurozone neighbours. The wider European Union is both its leading economic partner and an important political ally. Stability in Eurozone macroeconomic conditions and monetary policy is therefore crucial to Switzerland and, in turn, the Swiss Franc (CHF). Reflecting this dependence, some models put the correlation between Euro (EUR) and CHF performance at more than 90%, close to a perfect correlation.