USD/CHF Trading Dynamics: SNB's Challenge Amid US Inflation Reports
As traders express a desire to sell the US dollar (USD), the Swiss National Bank (SNB) faces challenges in managing the strength of the Swiss franc (CHF). Market speculation suggests that the SNB may be actively intervening in the foreign exchange market to maintain USD/CHF levels around 0.94. This situation places significant attention on the upcoming SNB interest rate meeting, along with crucial US economic indicators such as GDP, PMI, and PCE reports, as well as comments from various Federal Reserve officials.
The trading week begins with the release of PMI reports, which are essential for traders to gauge trends in economic growth, inflation, and employment. Among the various indices reported, the services PMI is particularly noteworthy due to the current high levels of services inflation.
Central bank doves may find it concerning that services PMIs are expanding at a pace that exceeds expectations. Notably, the US services PMI has shown its fastest growth since March 2022. Coupled with recent data on CPI, NFP, and ISM, a strong services PMI report could lead to increased selling pressure on the USD.
While the Federal Reserve's recent 50 basis point rate cut and dovish stance may encourage other central banks to consider rate reductions, it does not guarantee immediate cuts across the board. The Reserve Bank of Australia (RBA), for instance, is expected to maintain its cash rate at 4.35% into the next year, despite market expectations for rate cuts.
On Wednesday, Australia will release its monthly inflation report, following the RBA's meeting, which will provide further insights into the economic landscape.
Looking ahead, the SNB is anticipated to lower its interest rate by 25 basis points to 1% next week, as inflation has dropped to 1.1%, significantly below the SNB's 2% target. However, this decision is more influenced by the Swiss franc's effect on imports than by national CPI figures. The SNB has been vocal about the high value of the franc, with a Swiss lobby group advocating for an increase in EUR/CHF to 0.98, approximately 4% higher than current levels.
Analysts at ING suggest that the SNB has likely been active in the foreign exchange market, although concrete data has yet to confirm this. They estimate that the SNB intervenes when EUR/CHF falls below 0.84 or USD/CHF dips below 0.94. Observing the recent movements of USD/CHF, which rebounded from these levels on multiple occasions, lends credence to this theory.
As the US dollar is expected to weaken in the coming months, USD/CHF could become an interesting pair to monitor, especially if the US PCE inflation report surprises to the downside.
Friday will feature the highly anticipated monthly PCE inflation report, while Monday's flash PMIs and Thursday's GDP figures serve as precursors. Although PCE inflation is typically stable, even minor deviations from expectations could trigger significant market reactions. If US PMIs and GDP exceed forecasts, even a slight uptick in core CPI could lead to further short covering of the US dollar.