Swiss Franc retreats as US employment data draw traders’ attention

• Following the election-led sell-off, a steadier US Dollar puts pressure on the Swiss Franc.
• US Jobless Claims and Friday’s NFP release are in focus as traders assess the Fed’s next policy step.
• At 0%, the SNB’s policy rate puts the Franc at a yield disadvantage relative to major currencies.

Trading near 0.8176 at the time of writing, USD/CHF is 0.10% higher on the day, having bounced from an intraday low of 0.8135. The Swiss Franc (CHF) has surrendered its earlier gains on Thursday, with the pair supported by signs of stability in the US Dollar (USD) after volatility surrounding the US midterm elections.

Democratic gains in both houses of Congress sent the US Dollar to five-week lows on Wednesday. The outcome raised the possibility of political gridlock restricting further tax cuts and spending packages. It also prompted expectations that US President Donald Trump would face greater pressure to end the US-Iran war. Oil prices consequently fell sharply, easing some concerns over inflation.

With the initial election reaction subsiding, traders are refocusing on the Federal Reserve’s (Fed) hawkish policy outlook, helping the US Dollar regain some stability and lending underlying support to the Greenback. Having recovered from an intraday low of 101.20, the US Dollar Index (DXY) is trading near 101.60. The index measures the Greenback against a basket of six major currencies.

Energy prices nevertheless remain considerably above pre-war levels despite their fall, making it harder for the Fed to return inflation sustainably to its 2% target. As inflation continues to exceed target and economic growth remains resilient, traders see scope for another Fed rate increase in December. The CME FedWatch Tool puts the probability at around 79%.

Weekly Initial Jobless Claims, scheduled for Thursday, and Friday’s Nonfarm Payrolls (NFP) report are the next US employment releases in focus. Traders will scrutinise both for further indications of the Fed’s policy direction.

For the Swiss Franc, substantial interest rate differentials with other major economies remain a source of pressure. The Swiss National Bank’s (SNB) policy rate of 0% leaves the currency offering a lower yield than its peers.

Recent figures point to an increase in inflation, but with it still inside the SNB’s price stability range, the threshold for raising rates remains high. In remarks on Thursday, SNB Chairman Martin Schlegel said the central bank had “not yet seen any significant second-round effects” and “would intervene if price stability were at risk.”