The USD/CHF pair has dropped as the Swiss Franc gains value, thanks to positive news about a possible trade deal between the US and Switzerland. This deal could lower tariffs on Swiss imports from 39% to 15%, making Swiss products more competitive worldwide. We might see this agreement finalized within two weeks, which is helping the Swiss Franc’s current performance. At the same time, the US Dollar is holding steady, with focus on the Federal Reserve’s upcoming decisions. The US Senate has passed a government funding bill, which still needs approval from the House of Representatives. Currently, the US Dollar Index is stable at about 99.60. Many expect the Fed to consider a 25-basis-point rate cut in December, with a 62% likelihood. This follows two earlier cuts of 50 basis points each, aimed at strengthening a weakening labor market while inflation remains above 2%.

Currency Pair Developments

US employment data and federal budget talks are being closely monitored, as they may impact the US Dollar and other safe-haven assets. The Swiss Franc showed the best performance against the Australian Dollar today. With a potential US-Switzerland trade agreement coming in two weeks, there is a clear opportunity in the derivatives market. The drop in USD/CHF toward 0.8020 suggests strong bullish sentiment for the franc. We might consider buying USD/CHF put options that expire in early December to take advantage of a further decline if the deal is confirmed. The proposed cut in tariffs from 39% to 15% would greatly benefit key Swiss exports, like pharmaceuticals and watches, which made over $35 billion in trade with the US last year. This change supports a stronger franc in the long run. A successful deal could lead to prices not seen since the franc was de-pegged in 2015.

Preparing For Market Risks

We also need to prepare for the possibility that the deal may not happen. If negotiations stall, recent optimism could fade, leading to a sharp increase in USD/CHF. To protect against this risk, we might buy inexpensive, out-of-the-money call options or set up a long straddle to profit from big moves in either direction. Implied volatility for USD/CHF is expected to rise as the announcement date approaches. One-month volatility is around 7% now but could jump above 10%, similar to levels during the surprising Swiss National Bank rate hikes in 2022. Buying options now before volatility increases is a smart move. The overall monetary policy outlook also supports a lower USD/CHF. With the market anticipating a 62% chance of another Fed rate cut in December, the US Dollar faces a weakening trend. Meanwhile, the Swiss National Bank has kept its policy rate at 1.75% to manage inflation, creating a policy gap that favors the franc. Recent data from the Commodity Futures Trading Commission shows that large investors have increased their net long positions on the Swiss Franc by over 15% in the past four weeks. This indicates institutional funds are positioning for CHF strength. While this confirms the current trend, it also warns that a failure to secure the deal could lead to a quick reversal in these positions. Create your live VT Markets account and start trading now.

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