Swiss Franc struggles as US Dollar steadies, SNB keeps negative rates on table

The Swiss Franc (CHF) struggled against the US Dollar (USD) on Friday as the greenback showed signs of steadying. Trading around 0.8013, USD/CHF had dropped to a low of 0.7949 on Thursday, its weakest level since mid-June. However, even with this recovery, the currency pair was expected to finish the week on a negative note.

Dovish comments from Swiss National Bank (SNB) Governing Board member Petra Tschudin added to the negativity around the Swiss Franc (CHF). Tschudin stated in an interview with Finanz und Wirtschaft that if it became necessary to lower interest rates below zero to maintain inflation between 0% and 2% in the medium term, SNB would consider doing so. She also linked the Franc's weakness to higher interest-rate expectations abroad.

The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, traded around 98.81, showing a modest recovery after hitting a low of 98.56 earlier in the session. Nonetheless, the index remained close to a three-month low and was on track for a weekly decline of nearly 0.80%.

The preliminary S&P Global Composite PMI for August rose to a 52-month high of 56.0, up from 54.5, while the Services PMI climbed to a 20-month high of 56.8 from 54.6. Conversely, the Manufacturing PMI fell to a five-month low of 53.2 from 53.9. Despite these economic indicators, the US Dollar (USD) continued to weaken against its G10 peers following the US Treasury's announcement to double liquidity-support buybacks for longer-dated government securities to at least $4 billion per operation.

Strategists at Scotiabank suggested that the US Dollar (USD) was the main shield against mounting US fiscal concerns. They argued that the government's efforts to suppress long-term yields meant that the currency faced a greater negative impact from US fiscal policy worries. Moreover, fading expectations of a Federal Reserve (Fed) interest-rate hike further weighed on the USD.

According to the CME FedWatch Tool, there was approximately a 65% probability that the central bank would maintain rates unchanged next month following softer US employment and inflation data for July.

The Swiss Franc (CHF), Switzerland's official currency, is among the top ten most traded globally, with volumes surpassing the size of the Swiss economy. Its value is influenced by market sentiment, the country's economic health, and actions taken by the SNB. Although the Franc was pegged to the Euro (EUR) from 2011 to 2015, it gained more than 20% in value once the peg was removed, causing market turmoil.

Even though the peg is no longer in effect, CHF values often correlate strongly with Euro values due to the high dependence of the Swiss economy on the Eurozone.

The Swiss Franc (CHF) is considered a safe-haven asset, as investors tend to purchase it during times of market stress. This stems from the Swiss economy's perceived stability, strong export sector, substantial central bank reserves, and longstanding neutral stance on global conflicts. Turbulent times are likely to strengthen CHF against other currencies seen as riskier investments.

The SNB meets four times a year to decide on monetary policy, aiming for an annual inflation rate of less than 2%. When inflation surpasses the target or is forecasted to exceed it in the near future, the bank raises its policy rate to curb price growth. Conversely, lower interest rates tend to weaken the Swiss Franc (CHF). Macroeconomic data releases in Switzerland are crucial for assessing the economy's state and can impact CHF's valuation.

A strong Swiss economy, with low unemployment and high confidence, generally benefits CHF, while weak data points to depreciation. Given its small and open economy, Switzerland is highly dependent on the health of the Eurozone, which is the main economic partner and political ally for the country. With such dependency, correlation between the fortunes of the Euro (EUR) and CHF is close to perfect.