USD/CHF rises as the US Dollar receives safe-haven support in the context of escalating geopolitical tensions. Saudi-backed forces in Yemen initiated a significant offensive aimed at regaining territory from Houthi rebels. The Swiss Franc may find support as concerns about European debt affordability continue to rise. After two days of losses, the USD/CHF pair is on the rise, trading at 0.8310 on Monday at Asian time. The pair is currently appreciating due to a strengthening US Dollar amid rising safe-haven demand, which could be attributed to deteriorating geopolitical conditions in the Middle East. Saudi-backed forces in Yemen initiated a significant offensive aimed at regaining territory from Houthi forces. Tensions escalated sharply following the seizure of the Bab el-Mandeb strait by the Iran-aligned group. This strait serves as a critical maritime chokepoint between the Red Sea and the Gulf of Aden, facilitating a vital bypass route for regional crude exports that circumvent the Strait of Hormuz.
In light of the recent US employment figures that fell short of expectations, financial markets are currently assigning a probability of approximately 77.9% to the notion that the Federal Reserve will maintain its benchmark interest rates at the forthcoming policy meeting, an increase from the 74% probability observed prior to the labour report. This shift reflects an increasing belief that a cooling job market will lead policymakers to maintain baseline rates. This repricing in rate expectations follows a disappointing US labour market performance in September, when Nonfarm Payrolls expanded by only 29,000 positions. This figure fell well short of estimates targeting 90,000 additions and marked a steep slowdown from August’s revised figure of 133,000. Further indicating labour market softness, the US unemployment rate increased marginally to 4.2%, while the labour force participation rate inched up to 61.8%.
According to TD Securities, the expected timing of further Fed tightening has shifted, with economists now looking for rate increases in December and March rather than October and January. They describe this as “a more gradual hiking cycle than our original expectation,” and stress that “we still expect a total of 75bp of hikes.” The bank notes that “we do not believe that Friday’s jobs report changed much for the outlook,” but argues that “last week’s Fedspeak has made it clear that the FOMC is looking for caution – potentially due to the recent sell-off in rates,” reinforcing the case for a slower, later move higher in policy rates. However, further upside for the USD/CHF pair could be limited by simultaneous strength in the Swiss Franc. The Franc continues to attract support from safe-haven demand, influenced by increasing apprehensions regarding debt affordability among its European counterparts.
Furthermore, rising energy prices are fuelling concerns regarding government debt and spending throughout Europe, prompting risk-averse investors to seek refuge in the Swiss currency amid this time of increased volatility. Commerzbank’s Michael Pfister recognises that the recent appreciation of the Swiss Franc may not be solely unidirectional, warning that “there could well be periods of stabilisation in the coming weeks, which might put the franc under pressure again.” Nonetheless, he characterises any such consolidation as temporary, situated within a wider context where increasing global bond yields and escalating government debt concerns persist in bolstering the Franc’s attractiveness relative to the Euro, reinforced by Switzerland’s debt brake and relatively robust public finances.
