In September, housing starts in the United States experienced a decline, while pending home sales reached unprecedented lows, contributing to a depreciation of the US Dollar. Drone attacks in the Middle East and Ukraine have contributed to an increase in oil prices, thereby exacerbating inflationary pressures and influencing expectations for a rate hike by the Federal Reserve in December. Low Swiss interest rates stimulate carry trades, prompting investors to exchange the Franc for higher-yielding foreign assets.
USD/CHF experiences a decline for the third consecutive day, currently trading near 0.8230 during the Asian trading session on Thursday. The pair depreciates as the US Dollar faces challenges, with recent economic data indicating signs of weakness in the US economy, highlighted by a decline in September housing starts and pending home sales reaching a record low. Traders are currently assigning an 84% probability to the Federal Reserve maintaining interest rates at their current levels in the upcoming week, while also indicating a 90% likelihood of a rate increase in December. However, uncertainty persists following Fed Chair Kevin Warsh’s decision last week to refrain from providing guidance on the timing or necessity of future interest rate hikes.
However, the Greenback may receive support as surging oil prices fuel inflation fears and bolster expectations of a Federal Reserve rate hike. Oil prices experienced an uptick after a drone strike targeted Saudi Aramco’s Shaybah oil field, leading to two fatalities. This incident has heightened geopolitical tensions in the Middle East and sparked worries regarding possible disruptions to energy supplies. In tandem, Ukraine executed large-scale drone strikes against critical Russian oil infrastructure this week, signalling Kyiv’s intent to impede Moscow’s planned expansion of diesel exports under a recent agreement between Presidents Trump and Putin.
The downside for the USD/CHF pair may be constrained as the Swiss Franc faces ongoing challenges. This weakness is primarily driven by a widening interest rate differential between the United States and Switzerland, alongside mounting selling pressure stemming from carry trades. Market expectations indicate that US borrowing costs are likely to remain high, while Swiss interest rates continue to rank among the lowest worldwide. As a result, the Franc has gained appeal as a funding currency. Consequently, investors are withdrawing Franc-denominated loans and liquidating the currency to shift toward assets with higher yields, thereby exerting persistent downward pressure on the Franc.
