USD/CHF edged higher on Tuesday, with the US dollar supported by renewed US-Iran tensions and the Swiss franc under pressure. The pair traded around 0.7850, up 0.30% on the day, ending a four-day losing run. On Monday, US forces carried out “defensive strikes” in southern Iran targeting missile facilities and boats said to be attempting to deploy naval mines near the Strait of Hormuz, while Iran’s Islamic Revolutionary Guard Corps said it had shot down a US MQ-9 Reaper drone after it entered Iranian airspace.
Diplomatic contacts continued, with US Secretary of State Marco Rubio saying talks on a potential deal could “take a few days”, and insisting the Strait of Hormuz “has to be open”. The waterway remains largely closed, keeping a geopolitical risk premium in oil prices and adding to global inflation concerns. US inflation has accelerated since the war began, strengthening expectations the Federal Reserve may keep rates higher for longer and raising the market’s implied odds of another increase by year-end, while Swiss inflation hit a 16-month high in April but stayed within the Swiss National Bank’s 0%-2% target band; policymakers are expected to hold, with higher energy costs partly offset by franc strength and an “elevated willingness” to intervene if needed. Focus turns to the Conference Board Consumer Confidence release on Tuesday, Switzerland’s ZEW expectations on Wednesday and US PCE inflation on Thursday.
Safe-Haven Flows and Positioning in USD/CHF
Given the renewed geopolitical tensions, we see the US dollar’s safe-haven appeal strengthening against the Swiss franc. We believe traders should consider positioning for a continued rise in the USD/CHF pair in the coming weeks. Buying call options on USD/CHF could be an effective way to capitalize on this expected upward momentum while limiting downside risk.
Market volatility, as measured by the VIX index, has already jumped to 18 from a low of 13 last week, reflecting the increased uncertainty. This environment makes strategies that profit from price swings, like long straddles, more attractive, especially ahead of this Thursday’s critical US inflation data. Another high Personal Consumption Expenditures (PCE) reading, above the recent 2.7% trend, would almost certainly lock in a hawkish Federal Reserve stance.
Divergence in Central Bank Policies and Inflation Drivers
The policy divergence between the US and Swiss central banks is becoming more pronounced, which we see as the primary driver for the currency pair. Fed funds futures markets are now pricing in a 40% probability of another rate hike by year-end, a sharp increase from just 15% a month ago. With Swiss inflation holding steady at 1.4%, the Swiss National Bank has little incentive to tighten its policy, which should continue to weigh on the franc.
This pattern is reminiscent of past escalations in the Strait of Hormuz, which have historically led to sustained strength in the US dollar and higher oil prices. With Brent crude already pushing past $95 a barrel on the supply concerns, we expect this to fuel US inflation further. This reinforces our view that the Fed will remain committed to higher interest rates for a longer period.
However, we must remain alert to the risk of intervention from the Swiss National Bank. The SNB has a history of acting decisively to prevent excessive currency weakness, and its recent statements confirm an “elevated willingness” to do so. Therefore, we will use tight stop-losses on our long USD/CHF positions and consider buying cheap, out-of-the-money put options to hedge against a sudden reversal.
