Swiss Franc and Japanese Yen Trade Places in Latest Dollar Rush 

• CHF under pressure Vs USD, JPY et al 
• CHF/JPY under strain on USD demand 
• Federal Reserve rate expectations cited
• CHF yields “not backed by” SNB policy

Image © SNB

The Swiss Franc was a notable underperformer within the complex of perceived safe-havens during the final session of the week while the recently troubled Japanese Yen was the outperformer even as U.S. government bond yields lifted the Dollar against most other major currencies.

Switzerland’s Franc traded places with the Japanese Yen when it underperformed the big four safe-haven currencies within the G10 contingent on Friday as the U.S. Dollar climbed broadly in response to the latest insights from Federal Reserve (Fed) policymakers.

“Fed Chair Jerome Powell affirmed that rate hikes will be front loaded to rein in elevated inflation, and that the move at the FOMC meeting on 4 May will be 50 bps and not 75 bps,” says Philip Wee, an FX strategist at DBS Group Research.

“Powell also acknowledged that it would be challenging for the US economy to achieve a soft-landing without tipping into recession. Investors did not seek safety in the CHF and JPY,” Wee and colleagues also wrote in a Friday briefing.

Above: Interbank reference rates for selected U.S. Dollar pairs. Source: Netdania Markets.

Chairman Jerome Powell told the latest International Monetary Fund and World Bank Group meeting on Thursday that a larger-than-usual interest rate rise is now on the table in the U.S. for next month.

“Central bank speak has confirmed that 'deliberate' and 'forceful' action will ensue, but the idea of a 75bp hike casually tossed out by Bullard this week has gained traction in fed funds pricing,” says Mark McCormick, global head of FX strategy at TD Securities.

“This makes fading USD resilience very difficult, and we think the flirtation towards 1.0950 resistance in EURUSD remains a notable technical barrier,” McCormick and colleagues also said on Friday. 

While financial markets were already pricing-in a 0.50% uplift in the Fed Funds interest rate, from 0.5% to 1%, the Dollar still advanced broadly overnight and throughout much of the final session this week.

The result for the Franc was an extended climb above 0.95 in USD/CHF, a small uplift in EUR/CHF and a decline in the recently very strong CHF/JPY pair.

Above: USD/CHF shown at hourly intervals alongside USD/JPY and CHF/JPY.

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“The rise of Swiss bond yields reflects market speculation about aggressive rate hikes by the US Federal Reserve as well as rapid normalisation by the European Central Bank (ECB) and is not backed by Swiss National Bank (SNB) policy,” says Markus Allenspach, head of fixed income research at Julius Baer.

While Friday’s Dollar rush was widely described as being driven by evolving market expectations for Federal Reserve monetary policy, the price action in Franc exchange rates was potentially also partly the result of Swiss National Bank (SNB) monetary policy. 

The SNB still does lament the highly valued level of the Franc when measured in overall terms while its long and ongoing push to weaken the currency is a key instrument in the bank’s pursuit of its price stability mandate.  

Switzerland’s central bank maintains the lowest and most negative interest rate in the world in addition to a continuing commitment to using interventions in the currency market in order to prevent the Franc from strengthening further against the Euro as well as other currencies.

“In so doing, it takes the overall currency situation and the inflation rate differential with other countries into consideration. The Swiss franc remains highly valued,” the Swiss National Bank said in its March policy statement.

Above: USD/CHF shown at daily intervals alongside USD/JPY and CHF/JPY.