USD/CHF: dollar dominance

 
 
 
 
 
 
 

The dollar continues to dominate the market. Investors give preference to it against the backdrop of ongoing hostilities in Ukraine. Last Monday, the DXY dollar index topped 99.41, hitting a 21-month high. Commodity currencies are also showing positive dynamics against the backdrop of rising prices for energy and other commodities. Meanwhile, investors fear the worsening situation in the economy. Large-scale sanctions against Russia also threaten to negatively affect the entire global economy. The United States said yesterday that they are considering a complete ban on Russian oil imports if the situation in Ukraine worsens. However, this approach further strengthens the position of the dollar as the national currency of the United States, whose economy is not as heavily dependent on Russian gas and oil as the European one. European countries, highly dependent on Russian energy supplies, may face a third recession in two years, economists say, and the situation there threatens to turn into stagflation. It is characterized by a combination of high inflation and low growth. Now central banks may abandon plans to raise interest rates that have been cut for the duration of the pandemic. The US economy is in better conditions given its role as a major oil producer and high household savings. As expected before the start of the military conflict in Ukraine, the ECB and the Fed should have moved to a rapid reduction in stimulus measures. Now both central banks are likely to act cautiously given the new risks. "We need to be alert and flexible as we have to make decisions in very difficult circumstances", Fed Chairman Jerome Powell told lawmakers last week. The ECB also signaled that it would be cautious at Thursday's meeting, despite inflation accelerating to 5.8% in February against a target of 2%.

Against the backdrop of threats that the global economy is facing, the demand for defensive assets is growing significantly. Thus, yesterday gold broke through the psychologically significant mark of 2000.00 dollars per ounce, and today it is traded above this mark, while the yen and franc compete with the dollar in priority.

Meanwhile, the USD/CHF pair has been trading in ranges since last June, with a wider range between 0.9410 and 0.9000 and a smaller range between 0.9360 and 0.9100. A kind of balance line here is the 200-period moving average on the daily chart, which is currently passing through the 0.9195 mark.

USD/CHF D Chart

Franc received some support from the optimistic macro statistics from Switzerland, published on Monday. Thus, the unemployment rate in Switzerland decreased in February to 2.2% from 2.3% in January and the same forecast.

However, the main support for the franc comes from its status as a defensive asset.

Following the meeting, which ended in December, the Swiss Central Bank kept its current policy unchanged, leaving the key interest rate on demand deposits at -0.75%. The target range for the 3-month Libor rate was also left unchanged at -1.25% / -0.25%. The SNB statement once again, already traditionally, said that the Central Bank is still ready for foreign exchange interventions with the sale of the franc, if necessary, in order to withstand upward pressure on its rate. According to the leaders of the SNB, the franc remains highly overvalued. According to the head of the Central Bank of Switzerland, Jordan, "inflation in Switzerland has reached peak levels and will now decline next year", and "forecasts for inflation in the country remain within the range of price stability". The National Bank of Switzerland will continue to monitor the situation with the franc exchange rate and "will take appropriate measures if necessary", Jordan promised.

The threat of foreign exchange intervention, which the Swiss National Bank has not reported before or after, is certainly a strong deterrent for the strengthening of the franc, although it will retain its safe haven status, which will support demand for it.