The US Dollar Index has shown resilience as market participants assign an 87% likelihood to a quarter-point rate increase, driven by robust inflation figures. The Swiss Franc faces challenges stemming from the likelihood of an expanding interest rate differential between the US and Switzerland. The shifts in yen carry-trade are intensifying the selling pressure on the Swiss franc, coinciding with the Swiss National Bank’s decision to maintain its 0% interest rate policy. USD/CHF extends its winning streak for the fourth consecutive day, trading around 0.8180 during Asian hours on Monday. The pair appreciates as the US Dollar gains support amid aggressive Federal Reserve rate-hike bets for Wednesday’s decision following hotter US inflation reports. Financial markets have assigned an approximately 87% likelihood to a quarter-point rate increase at the Federal Reserve’s September meeting, a notable rise from the 59% probability observed just a week prior, as indicated by the CME FedWatch tool.
The US Consumer Price Index accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. Data released by the Bureau of Labour Statistics on Friday indicated that the US CPI experienced a month-over-month increase of 0.4% in August, resulting in a year-over-year rise of 3.4%. Both readings aligned with market expectations. Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, compared to 0.2% previously, surpassing the forecast of 0.2%. Moreover, the USD/CHF pair depreciates as the Swiss Franc faces challenges due to a potentially widening interest rate differential with the United States, in anticipation of the Federal Reserve’s policy decision later this week.
Meanwhile, the Swiss Franc is experiencing selling pressure due to a resurgence of yen-carry trades. A hawkish sentiment from the Bank of Japan and joint yen-buying interventions by Washington and Tokyo have diminished the attractiveness of the Japanese Yen as a funding currency, prompting traders to realign their positions toward alternative safe-haven currencies such as the CHF. This sudden swing exerts downward pressure on the Swiss Franc as investors liquidate their franc-funded loans to acquire higher-yielding assets in other markets. Meanwhile, in contrast to the policies of other major global central banks, the Swiss National Bank (SNB) is widely anticipated to keep its key policy rate steady at 0% through the end of the year, thereby sustaining the lowest rate among major economies.
Strategists note that their previously neutral stance on USD/CHF is starting to tilt higher as the pair tests the top of its recent range. They recall that on September 7, with the spot at 0.8100, they had highlighted that “for the time being, we expect USD to trade in a range between 0.8055 and 0.8155.” By September 10, with spot still around 0.8100, this was refined to “we continue to expect range-trading, but a narrower range of 0.8060/0.8135 is likely enough to contain the price movements in USD for now.” However, UOB points out that USD/CHF subsequently “rose to a high of 0.8147,” and that “upward momentum is starting to build.” In their one-to-three-week view, they now judge that “if USD breaks and closes above 0.8155, it could continue to rise toward 0.8175.” They add that “the odds of USD breaking clearly above 0.8155 will remain intact as long as USD holds above the ‘strong support’ level, now at 0.8085.”
