USD/CHF trades around 0.8900 after pulling back from four-month highs

• USD/CHF retreats from a four-month high of 0.8917 recorded on Thursday.
• Fed’s Powell stated that US economic performance has been "remarkably good," allowing to lower rates gradually.
• The Swiss Franc could face challenges due to the increased odds of an SNB’s rate cut in December.

USD/CHF pauses its five-day winning streak, trading around 0.8900 during Friday’s Asian session after retreating from a four-month high of 0.8917 reached on Thursday. This pullback is likely due to a downward correction in the US Dollar (USD) following remarks from Federal Reserve (Fed) Chair Jerome Powell.

Fed’s Powell stated that the recent performance of the US economy has been "remarkably good," allowing the Federal Reserve the flexibility to gradually lower interest rates. Meanwhile, Richmond Fed President Thomas Barkin stated that while the Fed has made strong progress so far, there’s still more work to be done to keep the momentum going.

The US Producer Price Index (PPI) rose by 2.4% year-over-year in October, up from a revised 1.9% increase in September (previously 1.8%) and surpassing market expectations of 2.3%. Meanwhile, the Core PPI, which excludes food and energy, increased by 3.1% YoY, slightly above the forecasted 3.0%.

The downside for the USD/CHF pair may be limited, as the Swiss Franc (CHF) could weaken further with the increased likelihood of an interest rate cut by the Swiss National Bank (SNB) in December. This expectation follows Switzerland's inflation rate falling to 0.6% in October, the lowest in over three years, signaling inflation is under control.

SNB Vice Chairman Antoine Martin stated in an interview published on Monday that the SNB is not committed to additional interest rate cuts in December. This comes despite earlier comments suggesting potential reductions to address inflation.

At its September meeting, the Swiss National Bank (SNB) indicated readiness for further rate cuts, with both Chairman Martin Schlegel and Vice Chairman Antoine Martin suggesting the possibility of additional reductions, including a potential return to negative rates, according to Reuters.

Swiss Franc FAQs

What key factors drive the Swiss Franc?

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

Why is the Swiss Franc considered a safe-haven currency?

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

How do decisions of the Swiss National Bank impact the Swiss Franc?

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.

How does economic data influence the value of the Swiss Franc?

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

How does the Eurozone monetary policy affect the Swiss Franc?

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.

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