Oil-driven inflation sustains US Dollar gains as Swiss Franc retreats

Higher oil prices intensify global inflation risks, supporting the US Dollar and lifting USD/CHF.
83.9% is the market-implied probability of a rate pause next week, according to the FedWatch Tool.
CHF 1.31 billion: Switzerland's September trade surplus narrowed as imports jumped 24.9%.

0.8260 is the approximate level for USD/CHF in Wednesday's Asian session. The pair is advancing after the previous day's losses. Safe-haven demand supports the US Dollar (USD) as higher oil prices intensify concerns over global inflation.

Conflicting signals on diplomatic contacts between the United States (US) and Iran are keeping oil traders cautious as prices climb. Talks remain active, but sentiment came under pressure after high-level meetings in Tehran. Pakistan’s army chief, Field Marshal Asim Munir, met senior Iranian diplomatic and military officials to discuss bilateral relations and the progress of negotiations with Washington. A diplomat participating in the talks said efforts to resolve the conflict were continuing, but reports suggesting a final agreement was imminent were premature.

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

An 83.9% probability of unchanged interest rates next week is currently priced in by traders, according to the CME FedWatch Tool. Markets also assign a 90% chance to a December rate hike as they assess the Federal Reserve's (Fed) next steps. Fed Chair Kevin Warsh, however, remained neutral. He stressed that he does not "prejudge" interest rate decisions, offering no clear indication of whether the central bank will increase rates or leave them unchanged at its forthcoming October policy meeting.

CHF 1.31 billion was Switzerland's trade surplus in September, figures released on Tuesday by the Federal Customs Administration of Switzerland showed. The balance narrowed sharply from CHF 4.2 billion in the preceding month to its lowest since November 2022. Imports drove the contraction, surging 24.9% month on month, the strongest rise in more than one year. Export growth was comparatively modest at 1.5% MoM.

0.8200 Remains UOB's USD/CHF Focus; 0.8300 Caps Upside

Recent sessions have progressively strengthened the bearish outlook for USD/CHF, according to UOB Group strategists. With spot near 0.8280 last Friday, 16 Oct, they had warned that “downward momentum is building and if USD closes below 0.8245, it could decline toward 0.8225.” A subsequent drop to 0.8215 led them to revise their assessment yesterday, 19 Oct. With spot then around 0.8240, they said USD “could decline further to 0.8200.” The strategists add that they “will continue to hold the same view as long as USD holds below 0.8300,” retaining that ceiling as their unchanged “strong resistance” level.

Swiss Franc: Key Questions

Swiss Franc: Main Currency Drivers

Switzerland's official currency, the Swiss Franc (CHF), ranks among the ten most actively traded currencies worldwide. Trading volumes far exceed the size of the Swiss economy. Broad market sentiment, domestic economic conditions and Swiss National Bank (SNB) actions are among the influences on its value. A peg linked the Swiss Franc to the Euro (EUR) between 2011 and 2015. Its abrupt removal sent the Franc more than 20% higher and caused market turmoil. Although the peg no longer applies, CHF movements typically remain closely aligned with those of the Euro because Switzerland's economy relies heavily on the neighbouring Eurozone.

Swiss Franc: The Safe-Haven Case

Investors tend to buy the Swiss Franc (CHF) during periods of market stress, giving it safe-haven status. That appeal reflects Switzerland's perceived standing globally. Economic stability, a strong export sector, substantial central bank reserves and a longstanding policy of neutrality in international conflicts make its currency attractive to investors seeking to avoid risk. In turbulent periods, CHF is therefore likely to appreciate against currencies regarded as riskier investments.

Swiss National Bank: Policy Effects on the Franc

Monetary policy decisions are taken by the Swiss National Bank (SNB) four times a year, with one meeting each quarter. This is less frequent than at other major central banks. Its objective is annual inflation below 2%. If inflation exceeds that target, or is projected to do so in the foreseeable future, the SNB will seek to curb price increases by raising its policy rate. Higher rates generally support the Swiss Franc (CHF): the resulting increase in yields makes Switzerland more attractive to investors. Lower rates, by contrast, typically put downward pressure on CHF.

Swiss Franc: Economic Data and Valuation

Switzerland's macroeconomic releases provide important evidence of economic conditions and can move the Swiss Franc (CHF). Although the economy is generally stable, abrupt shifts in growth, inflation, the current account or central bank currency reserves can trigger CHF fluctuations. Strong economic growth, low unemployment and robust confidence usually support the currency. Data signalling a loss of economic momentum, in contrast, are likely to weaken CHF.

Eurozone Monetary Policy: Implications for the Swiss Franc

The health of neighbouring Eurozone economies matters greatly to Switzerland, given its small, open economy. Switzerland's principal economic partner and an important political ally is the broader European Union. Stable macroeconomic conditions and monetary policy in the Eurozone are therefore crucial for Switzerland and, in turn, the Swiss Franc (CHF). Reflecting this reliance, some models put the correlation between movements in the Euro (EUR) and CHF at more than 90%, close to a perfect correlation.