Swiss Franc holds its ground amid demand for safe havens

• Safe-haven buying lifts the Swiss Franc as investors remain cautious and anticipate political deadlock.
• Falling US bond yields and reduced expectations of Fed rate rises cap the Greenback’s gains.
• Contained Swiss inflation, reaffirmed by Chair Schlegel, supports expectations that the SNB will leave rates unchanged.

With the forthcoming US Nonfarm Payrolls (NFP) report expected to be pivotal for expectations surrounding the Federal Reserve’s (Fed) December policy decision, USD/CHF is trading around 0.8170 in Friday’s Asian session. The pair is flat after recovering its losses for the day, with broad market caution lending support to the US Dollar (USD). Investors continue to await the employment figures.

Lower US bond yields could nevertheless limit further gains in the Greenback. Oil prices fell following a Democratic sweep, amid speculation that the election would hasten an end to the Iran war. This also led traders to scale back expectations of US Federal Reserve (Fed) rate increases. CME’s FedWatch tool currently puts the market-implied probability of a December rate rise at nearly 70.9%. The Democrats’ victory has also fuelled expectations of political deadlock in Washington, potentially curbing government spending and, in turn, slowing economic growth.

Expectations of tighter regulation of the AI buildout following the Democratic sweep boosted demand for safe havens, strengthening the Swiss Franc (CHF). The result could also bring political deadlock and a greater likelihood of US fiscal restraint. Increased demand for safety could, however, encourage traders to unwind franc-funded carry trades. These positions had benefited from the widening interest rate differential with the US and had put substantial pressure on the CHF. With Swiss borrowing costs having been the lowest in the world for over a year, the franc has been an appealing source of funding for investments offering higher yields.

A near-term rate increase from the Swiss National Bank (SNB) is not expected, a view supported by Chair Schlegel’s comments reaffirming that domestic inflationary pressures remain contained. Higher energy costs and a weaker franc pushed Swiss inflation up in October. Since then, however, the currency has appreciated, which could alleviate imported cost pressures.

Over a one-to-three-week horizon, UOB Group analysts retain a cautious, negative outlook for USD/CHF, although they say a more pronounced decline has not yet been fully confirmed. Recounting their earlier assessment, they state: “tracking our negative USD view from late last week, we highlighted yesterday that USD ‘must break and hold below 0.8140 before further declines can be expected.’ We added, ‘the next level to watch below 0.8140 is 0.8110.’”

The closing level did not confirm a decisive break of 0.8140: although USD/CHF did “break below 0.8140,” it later “rebounded to close at 0.8168 (-0.46%),” according to UOB. The analysts nonetheless note that “given the sharp decline to 0.8124, there is a chance for USD to test 0.8110 before the risk of a recovery increases.” They identify 0.8205 as the upside threshold that would invalidate the immediate bearish scenario, emphasising that “a breach of 0.8205 (‘strong resistance’ was at 0.8220 yesterday) would mean that 0.8110 is not coming into view,”