USD/CHF rallies over 3.0% since August 5 lows

• USD/CHF extends gains after recession-panic selling ebbs away.  
• Swiss manufacturers call their central bank to counter the Franc’s appreciation.  
• US inflation data released in days to come could further impact pair. 

USD/CHF rises almost half a percent on Monday to trade in the 0.8690s as the US Dollar (USD) extends its rebound against safe-haven currencies. The rally marks an over 3.0% recovery from the 0.8433 lows reached on August 5, when US recession fears led to panic selling in markets at the beginning of last week. 

A lower-than-expected US Nonfarm Payrolls result in July sparked the sell-off, however, markets regained their composure on Thursday after robust US Jobless Claims data helped reassure investors that the US economy was not falling into a recession. Since then the US Dollar has rebounded, particularly against the Swiss Franc (CHF), which especially benefited during the sell-off due to its safe-haven status, which attracts increased inflows during times of strife.

The depreciation of the Swiss Franc (CHF) will come as a relief to Swiss manufacturers who have been complaining about the Francs appreciation hampering their goods export competitiveness. 

“The Swiss National Bank is called upon to act quickly within the scope of its mandate,” said Swissmem, an association of Switzerland’s mechanical and electrical engineering manufacturers last Wednesday, according to Swissinfo.ch. “The SNB has the leeway to prevent or cushion any future shock appreciation using the instruments it considers best,” it added.  

Despite faring better than many other developed economies, Switzerland is struggling to gain traction amid weak export demand. The Swiss Manufacturing Purchasing Managers Index (PMI) has remained below 50, the dividing line between contraction and growth since the start of 2023. In fact, ​​Swiss Manufacturing PMI came in at 43.5 in July 2024, down from 43.9 in the previous month and worse than market expectations of 43.8.

USD/CHF may see further upside as the Swiss National Bank (SNB) is widely expected to cut interest rates by 0.25% to 1.25% at its September meeting. Such a cut would weaken the CHF as lower interest rates generally tend to decrease foreign capital inflows. It would mark the third SNB rate cut since it began easing monetary policy in March 2024. Rate-cut expectations are reinforced by Switzerland's annual inflation rate, which stands at 1.3% in July 2024, unchanged from the previous month and in line with market expectations. 

The US Dollar meanwhile is likely to remain capped versus the Swiss Franc due to increasing bets the US Federal Reserve (Fed) could opt for a mega cut at its September meeting. Market probabilities stand at about a 50/50 chance of either a 0.25% cut of the fed funds rate to 5.25% and a 0.50% cut to 5.00%. These are a lot higher than earlier in the summer when sticky inflation continued to suppress expectations of future rate cuts from the Fed. 

US inflation data in the form of the US Producer Price Index (PPI) and Consumer Price Index (CPI) in July, out on Tuesday and Wednesday respectively, is likely to further color the outlook for interest rates in the US and therefore the trajectory of the US Dollar. Falling inflation is likely to weigh on USD/CHF whilst rising inflation could lead to extension of the pair’s recovery.