Swiss Franc holds on to gains after SVME PMI release

October’s SVME PMI climbed to 56.7, beating forecasts for an unchanged reading of 55.3.
Weaker safe-haven demand weighed on the US Dollar as diplomatic efforts in the Middle East progressed, although fears over the US-Iran conflict persisted.
Robust US economic and inflation readings have led traders to assign a 75% probability to a December rate hike.

Pressure on USD/CHF has returned after the previous trading day’s modest advance, with the pair trading near 0.8220 in Monday’s European session. Gains in the Swiss Franc (CHF) following domestic economic releases continue to keep the pair on the back foot.

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

Against forecasts for an unchanged reading of 55.3, the SVME Purchasing Managers’ Index advanced to 56.7 in October. September’s Swiss Real Retail Sales grew 1.6% year-on-year, compared with the previous reading of 3.9%, revised from 3.2%. Markets had anticipated growth of 3%.

Reduced appetite for safe-haven assets is weighing on the US Dollar (USD), pulling USD/CHF lower. Diplomatic efforts to resolve the Middle East conflict continue, although concerns persist that the US could resume military action against Iran. Talks between Qatari and Iranian officials entered a third consecutive day as they sought an agreement to end the war before the US midterm elections.

Growing expectations of a Federal Reserve rate hike could, however, help the US Dollar recover. Recent US macroeconomic releases have signalled a resilient economy and persistent inflation, strengthening rate-hike bets. The CME FedWatch Tool shows traders assigning roughly a 75% probability to a December rate increase.

Among the next major releases on traders’ radar are the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services figures. Several Federal Reserve officials are also due to speak during the week, with their comments expected to provide additional insight into the central bank’s monetary policy trajectory.

Swiss Franc: Key Questions Answered

Which forces shape the Swiss Franc’s value?

Switzerland’s official currency, the Swiss Franc (CHF), ranks among the world’s top ten most traded currencies, with trading volumes far exceeding the size of the Swiss economy. Broad market sentiment, domestic economic conditions and measures taken by the Swiss National Bank (SNB) are among the factors influencing its value. From 2011 to 2015, the Swiss Franc was pegged to the Euro (EUR). The sudden removal of that peg sent the Franc’s value up by more than 20%, triggering market turmoil. Although the peg no longer applies, the Swiss economy’s heavy reliance on the neighbouring Eurozone means that CHF movements still tend to track those of the Euro closely.

What gives the Swiss Franc its safe-haven status?

During periods of market stress, investors tend to buy the Swiss Franc (CHF), giving it the status of a safe-haven asset. Switzerland’s reputation rests on its stable economy, robust export sector, sizeable central bank reserves and longstanding policy of neutrality in global conflicts. These attributes make its currency an appealing option for investors seeking to avoid risk. In turbulent periods, CHF is likely to appreciate against currencies regarded as riskier investments.

How can Swiss National Bank decisions move the Swiss Franc?

Monetary policy decisions at the Swiss National Bank (SNB) are taken at four meetings a year, once each quarter, a lower frequency than at other major central banks. Its objective is to keep annual inflation below 2%. If inflation exceeds the target, or is projected to do so in the foreseeable future, the bank will seek to curb price increases by raising its policy rate. By lifting yields and making Switzerland more attractive to investors, higher interest rates generally support the Swiss Franc (CHF). Lower rates, by contrast, tend to put pressure on CHF.

What can Swiss economic releases mean for the Franc?

Swiss macroeconomic releases provide important evidence of the economy’s health and can influence the valuation of the Swiss Franc (CHF). Although Switzerland’s economy is generally stable, abrupt shifts in growth, inflation, the current account or central bank currency reserves can prompt moves in CHF. Strong economic growth, low unemployment and elevated confidence typically support the currency. Data signalling a loss of economic momentum, on the other hand, is likely to weaken CHF.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland’s small, open economy relies heavily on economic conditions in the neighbouring Eurozone. As its leading economic partner and an important political ally, the broader European Union plays a central role in Switzerland’s fortunes. 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 movements in the Euro (EUR) and CHF at more than 90%, approaching a perfect correlation.