CHF Exchange Rate Down Vs. Major Counterparties
October 30, 2023Weak Demand
In the beginning of the month investors were keen to buy Swiss francs. After Hamas terrorists’ violent attack in Israel on 7th October and the military action of Israelis in Gaza that followed, the world was in shock. Economic and financial markets also reacted heavily, and in such times of turmoil, the demand for Swiss franc is very high. The Swiss currency is considered one of the best safe haven assets, together with US dollar and gold. It means it holds value very well even when everything on the market is in red. CHF exchange rate was going up versus euro or USD. However in recent days the demand for Swiss franc has been weaker. In last two weeks investors were not that keen to buy Swiss francs with many deciding to sell Swiss francs. As a result CHF exchange rate went down in European trade against a basket of major rivals, including euro and US dollar. Its losses has sharpened for the fifth straight session against US dollar. Especially high losses were recorded versus USD. USD/CHF rose 0.2% today to 0.9040, the highest exchange rate since October 16. Franc lost 1.1% against the dollar last week, the first weekly loss in a month.
US-Switzerland Interest Rate Gap
The current crisis of CHF exchange rate versus USD is caused by renewed concerns about US-Swiss interest rate differences. The current US-Switzerland interest rate gap stands at 375 basis points. Current Swiss interest rates are at 1.75%, the highest level since 2008, after series of hikes this year. Such rates will likely remain through 2024. The gap can grow even further with speculations that another 0.25% interest rate hike by the Federal Reserve is expected by the end of this year. Meanwhile it's unlikely the Swiss National Bank will further raise interest rates at the December meeting. In Switzerland inflation declined below the 2% target, meaning there is no such rush and need to curb it by hiking interest rates. The SNB was fighting with inflation by hiking rates that also triggered higher exchange rate of Swiss franc. Good exchange rate of CHF reduces inflation pressures. The SNB recently said that recent aggressive policy tightening continues to constrain inflationary pressures.