Swiss Franc struggles near lows as monetary policy divergence boosts US Dollar

The Swiss Franc (CHF) consolidates losses against the US Dollar (USD) on Tuesday, with the USD/CHF trading just below one-and-a-half-month highs at the 0.8200 level. The monetary policy divergence between the US Federal Reserve (Fed) and the Swiss National Bank (SNB) is weighing down the Swissie, which has depreciated nearly 1.2% so far in September despite its traditional safe-haven appeal.

The combination of a strong US Nonfarm Payrolls (NFP) report in August and the hot US inflationary pressures seen last week have boosted market expectations that the Fed will hike interest rates on Wednesday. Futures markets are pricing a 92% chance of a quarter-point rate hike after their September 16 meeting, and another one before the end of the year, according to figures by the CME’s FedWatch Tool. This sentiment has been buoying the US Dollar across the board this week.

The SNB, on the contrary, is widely expected to leave interest rates on hold at the current 0% level for the rest of the year and most likely well into 2027. Consumer inflation accelerated to a 0.8% year-over-year rate in August, up from 0.4% in July, which prompted the SNB President,Martin Schlegel to affirm that the “wind has changed on interest rates,” but markets, so far, have discarded an imminent monetary policy change.

Carry traders set their gaze on the Swissie

Against this backdrop, the low SNB interest rates set the Swiss Franc as one of the favourite funding currencies for carry trade, especially after the Bank of Japan’s (BoJ) hawkish repricing triggered a massive unwinding of Yen short positions.

This practice consists of borrowing a low-yielding currency to buy a higher-yielding one, pocketing the differential, and is having its best run in years, according to Citi data released by Reuters.

Rabobank strategists, however, warn that "the CHF could see a surge in long positions if market anxieties rise,” underscoring the Swiss Franc’s enduring safe haven appeal. "Given that next year will bring the French Presidential election and the prospect of a victory by the far-right, this may be a risk that many market participants may be wary about,” and one that could still trigger renewed demand for the Franc, says Rabobank in a note.