Why is the Swiss Franc weakening as oil-driven inflation helps the US Dollar retain its gains?

USD/CHF advances as higher oil prices intensify global inflation risks, lending support to the US Dollar.
Markets assign an 83.9% probability to rates staying unchanged next week, according to the FedWatch Tool.
A 24.9% jump in imports narrowed Switzerland's trade surplus to CHF 1.31 billion in September.

USD/CHF rebounds from the previous day's decline to trade near 0.8260 in Wednesday's Asian session. Supporting the pair's advance, the US Dollar (USD) benefits from safe-haven demand as climbing oil prices fuel concerns over global inflation.

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

Cautious sentiment surrounds diplomatic contacts between the United States (US) and Iran, with traders weighing conflicting signals as oil prices climb. Talks are still under way, but high-level meetings in Tehran weighed on market sentiment. Pakistan’s army chief, Field Marshal Asim Munir, held discussions with senior Iranian diplomatic and military leaders on bilateral relations and the progress of negotiations with Washington. According to a diplomat participating in the discussions, efforts to resolve the conflict continue, but reports suggesting that a final agreement is imminent are premature.

Uncertainty over the Federal Reserve's (Fed) next policy steps remains a focus for financial markets. The CME FedWatch Tool shows traders assigning an 83.9% probability to unchanged interest rates next week and a 90% chance of a rate increase in December. Fed Chair Kevin Warsh, however, struck a neutral tone. Stressing that he does not "prejudge" interest rate decisions, he offered no clear indication of whether the central bank would raise rates or leave them unchanged at its forthcoming October policy meeting.

A sharp rise in imports pushed Switzerland's trade surplus down to its lowest level since November 2022. Figures published on Tuesday by the Federal Customs Administration of Switzerland showed a September surplus of CHF 1.31 billion, compared with CHF 4.2 billion in the preceding month. Imports climbed 24.9% month-on-month, marking a more than one-year high, while exports registered a modest 1.5% MoM increase.

Can USD/CHF reach 0.8200 as UOB retains its bearish bias below 0.8300?

Recent sessions have progressively strengthened the bearish outlook for USD/CHF, according to strategists at UOB Group. They point back to last Friday, 16 Oct, when spot was around 0.8280 and they warned that “downward momentum is building and if USD closes below 0.8245, it could decline toward 0.8225.” After the pair dropped to a low of 0.8215, they revised their assessment yesterday, 19 Oct, with spot near 0.8240, saying USD “could decline further to 0.8200.” Their stance remains unchanged: UOB says it “will continue to hold the same view as long as USD holds below 0.8300,” retaining the same “strong resistance” level as the ceiling for gains.

Swiss Franc: Frequently Asked Questions

Which factors shape the Swiss Franc's movements?

Among the world's ten most actively traded currencies, the Swiss Franc (CHF) is Switzerland's official currency, with trading volumes far exceeding the size of the country's economy. Broad market sentiment, Switzerland's economic performance and measures taken by the Swiss National Bank (SNB) are among the influences on its value. From 2011 to 2015, the Swiss Franc maintained a peg to the Euro (EUR). Its abrupt removal sent the Franc more than 20% higher and triggered market turmoil. Although the peg no longer applies, the Swiss economy's heavy reliance on the neighbouring Eurozone means that CHF movements tend to remain closely correlated with those of the Euro.

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. This reflects Switzerland's perceived standing internationally: economic stability, a robust export sector, substantial central bank reserves and a long-established policy of neutrality in global conflicts make its currency attractive to investors seeking to avoid risk. In turbulent conditions, CHF is likely to appreciate against currencies regarded as riskier investments.

How do Swiss National Bank policy decisions affect the Swiss Franc?

Monetary policy decisions at the Swiss National Bank (SNB) are taken at four meetings a year, held 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 forecast to do so in the foreseeable future, the SNB will seek to restrain price increases by raising its policy rate. The higher yields associated with higher interest rates generally support the Swiss Franc (CHF), as they make Switzerland more attractive to investors. Lower rates, by contrast, tend to put pressure on CHF.

What role does economic data play in Swiss Franc valuations?

Switzerland's macroeconomic releases help investors assess the economy's condition and can move the Swiss Franc (CHF). Despite the economy's general stability, abrupt shifts in growth, inflation, the current account or central bank currency reserves can trigger currency movements. Strong economic growth, low unemployment and elevated confidence usually lend support to CHF. Data indicating a loss of economic momentum, on the other hand, is likely to weaken the currency.

Why does Eurozone monetary policy matter for the Swiss Franc?

Switzerland's small, open economy relies heavily on the performance of its neighbouring Eurozone economies. As Switzerland's principal economic partner and an important political ally, the broader European Union makes stability in Eurozone macroeconomic conditions and monetary policy crucial for 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%, or almost perfect.