USD/CHF rose for a fifth day, trading near 0.7850 in Asian hours on Friday. The move followed a firmer US Dollar after US Retail Sales data.
US Retail Sales rose 0.5% month-on-month in April, matching estimates and easing from 1.6% in March. Sales increased 4.9% year-on-year, above the 3.3% forecast.
The US Dollar also gained after a change in Federal Reserve leadership. Stephen Miran resigned from the Board of Governors, clearing the way for Kevin Warsh to take over as Fed Chair.
Inflation linked to Middle East tensions supported expectations that the Fed will keep rates high for longer, or raise them further. US President Donald Trump said on Thursday that China’s President Xi offered help to de-escalate the Iran conflict.
In Switzerland, producer and import prices fell 2.0% year-on-year in April, extending a deflation run. This reduces the case for rate rises and may keep the SNB policy rate at 0%, or lead to FX action to limit Franc strength.
Swiss consumer sentiment improved to -40 versus -46 expected. Attention is on whether the SNB treats deflation as a trigger for stronger currency intervention.
The fundamental story for USD/CHF remains the growing difference between US and Swiss monetary policy. We see ongoing strength in the US, with April’s year-over-year retail sales growth of 4.9% showing that consumers are still spending despite high interest rates. This policy gap makes holding US dollars more attractive than the Swiss franc, suggesting a continued upward trend for the pair in the coming weeks.
Inflation remains a key driver, and the latest US Consumer Price Index data for April showed a stubborn 3.4% annual increase, reinforcing the Fed’s “higher for longer” stance. With Kevin Warsh now at the helm of the Fed, the market is pricing in a more aggressive approach to fighting inflation, which should further support the dollar. However, we should note that the most recent jobs report showed a cooling, with only 175,000 jobs added, which could temper the most aggressive rate hike expectations.
In Switzerland, the 2.0% annual drop in producer prices is a serious concern for the Swiss National Bank, keeping the pressure on for a dovish policy. While consumer inflation is still positive at 1.4%, this is far below the SNB’s target and unlikely to stop them from considering currency interventions to weaken the franc. Looking at foreign currency reserves, we see they have been relatively stable over the past few months, indicating the SNB has been patient but could act soon if the franc strengthens unexpectedly.
Geopolitical tensions in the Middle East are adding a layer of uncertainty, which normally benefits the Swiss franc as a safe-haven currency. However, the dollar’s high yield is currently winning this battle for capital, and President Trump’s comments about Chinese assistance in the Iran conflict have slightly eased immediate fears. This dynamic suggests that any flight to safety might be short-lived, with traders quickly returning their focus to the interest rate advantage of the dollar.
For derivative traders, this environment favors strategies that benefit from a rising USD/CHF, such as buying call options or using bull call spreads to limit costs. Volatility is expected to rise, particularly around SNB meeting dates, making long volatility positions potentially profitable. We must not forget the lesson from back in 2015, when the SNB abruptly removed its currency peg, showing it can act decisively and cause extreme market moves without warning.
