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Is the Swiss franc ready to dethrone King Dollar?

11:04, 12 August 2022

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Red & white Swiss flag draped under window
Swiss Flag Hanging From Window – Photo: Getty

USD/CHF fell 6.5% from its June highs, entering a new downward trend after breaking below both the 50-day and 200-day moving averages. The SNB is expected to raise rates by 50 basis points next month, pushing them in positive territory for the first time since July 2011.

Will investors continue to seek refuge in the Swiss Franc in the face of easing U.S. inflation rates, rising global growth worries and geopolitical risks?

Rabobank FX strategist Jane Foley says climbing speculation that the Swiss National Bank (SNB) may hike rates again in September to quash inflation and prevent interest rate ECB differentials “which is also expected to hike rates next month”, is helping fuel gains. The SNB’s June 50 basis point rise was also on the back of 2.9% inflation – an inflation ‘problem’ other countries will envy. 

“Higher inflation,” says Foley, “is stoking the view that the SNB may no longer push back against CHF strength versus the EUR. EUR/CHF has been holding below parity since late July.” 

Out of neutral

CHF’s push higher is a part-consequence of global volatility from the Russian-Ukrainian war but also a sign that traders are diversifying risk as US Federal Reserve tightening has become priced in. 

Swiss inflation at 3.4% in July did not deviate from June. But this is still the highest number since October 1993 points out Capital FX strategist Piero Cingari. 

“As a result,” says Cingari, “inflation remains well above the Swiss National Bank’s 2% target, necessitating a steady pace of interest-rate hikes, which is going to bolster the franc.”

But Switzerland is also a major exporter so euro and dollar exchange rates have a closely-watched competitiveness edge, compounded by the country’s ‘safe haven’ – and commercially highly secretive, often – status. 

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Strong labour support

Meanwhile a 2% unemployment rate in July 2022 – the same as in June – and the lowest since November 2001 demonstrates that the Swiss labour market is tight. 

GBP/JPY

163.95 Price
-0.900% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.029

GBP/USD

1.14 Price
-1.060% 1D Chg, %
Long position overnight fee -0.0036%
Short position overnight fee 0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.00013

USD/JPY

144.38 Price
+0.160% 1D Chg, %
Long position overnight fee 0.0037%
Short position overnight fee -0.0108%
Overnight fee time 21:00 (UTC)
Spread 0.012

EUR/USD

0.99 Price
-0.630% 1D Chg, %
Long position overnight fee -0.0085%
Short position overnight fee 0.0024%
Overnight fee time 21:00 (UTC)
Spread 0.00006

In other words, the Swiss economy is performing well says Cingari, “despite negative spillovers from the deteriorating economic outlook in the Eurozone. A strong jobs market gives the SNB the green light to speed up the pace of hikes”.

Less aggressive hikes from the US Federal Reserve look more likely given that US inflation rate has come in at 8.5% compared to an expected 8.7%. 

If the deceleration in US inflation persists, “the interest rate differential between the Federal Reserve and the Swiss National Bank (SNB) will narrow, thereby supporting the franc,” adds Cingari.

Sterling down

Global growth worries and rising gold prices typically sustain demand for safe-haven and recession-hedging assets. But Switzerland, like the UK, has also been criticised for its close relationship with Russian money. 

Earlier, new data revealed that the UK economy shrank 0.6% in June compared to 0.5% growth in May. The first estimate of second quarter growth came in at -0.1% which was not as extreme as feared.

“The fall in growth was largely down to the extra bank holiday, as well as the winding down of Covid testing, and vaccination centres,” says Thanim Islam at Equals Money.

“As a result, the sterling is marginally lower on the day. Focus will continue to be on growth for the latter half of the year, as the energy cap is set to rise in October.”

Further reading

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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