FX Market Update: CHF and EUR In Focus Ahead of ECB, SNB Decisions

US dollar rises after mixed jobs data

The US dollar index rose slightly after the US published mixed jobs numbers last Friday. According to the Bureau of Labor Statistics (BLS), the economy added over 227k jobs. A steep recovery after it created just 30k a month earlier.

Wage growth remained strong during the month. However, the participation rate and the unemployment rate rose slightly to 4.2% during the month.

Analysts expect that the Fed will now deliver another 0.25% interest rate cut in the next meeting. If that happens, it will bring the year-to-date cuts to about 1%. In a note, analysts at ING wrote:

US non-farm payrolls rose broadly in line with expectations after recent strike and hurricane distrortions, but unemployment picked up by more than expected. With valid questions over the quality of the jobs the US is currently creating, we continue to expect the Fed to cut the policy rate 25bp on 18 December.

ING Analysts

The next key catalyst for the US dollar index will be the upcoming US Consumer Price Index (CPI) scheduled for Wednesday. Odds of a rate cut will rise if these numbers show that inflation resumed the downward trend in November.

Swiss franc in the spotlight ahead of SNB decision

The Swiss franc (CHF) has strengthened against the US dollar as the focus shifted to the upcoming Swiss National Bank (SNB) decision. The USD/CHF exchange rate was trading at 0.8800, down by almost 2% from its highest level in September.

Most importantly, the EUR/CHF pair continued its downtrend, reaching a low of 0.9255. It has dropped by 6.50% from its highest level this year.

The EUR/CHF pair is watched closely because of the volume of trade that happens between the two countries. Ideally, a stronger Swiss franc hurts Switzerland exporters to Europe by making their products more expensive.

The main catalyst for the CHF will be the upcoming Swiss National Bank interest rate decision. Analysts expect the bank to continue cutting interest rates in a bid to devalue the currency. It has already slashed rates three times this year, moving them from 1.75% to 1.0%.

Chinese yuan crashes amid geopolitical risks

The Chinese yuan has been in a strong downtrend in the past few months as concerns about its stimulus and geopolitical risks rose. The USD/CNY exchange rate rose from the October low of 7.00 to a high of 7.30 last week.

This decline is because Beijing has pledged to pump more cash into the economy. Precisely, the government is injecting $1.4 trillion to the economy to support local governments that are struggling after the collapse of the real estate sector. Currencies often deteriorate after a big stimulus.

The currency has also dropped after Donald Trump pledged to re-introduce his trade war with China. He has threatened to impose a universal tariff on all goods imported from the country, a move that China will retaliate. Still, it is unclear how this trade war will evolve and its impact on the two economies.

Euro stable ahead of ECB decision

The euro has been in the spotlight as the currency reacted to numerous events. In France, the second-biggest economy in the region, the government collapsed last week.

Economic data from the region showed that countries like Germany, Spain, and Italy remained under pressure.

For example, data released on Friday confirmed that Germany’s industrial production dropped by 1% MoM in October after falling by 2.5% a month earlier. It has dropped by 5% YoY, a sign that the economy is struggling.

Most notable is the fact that Germany’s industrial production has dropped by about 10% from its pre-pandemic levels. Also, Volkswagen, one of the biggest companies in Germany is making large job cuts as its business slowed.

Therefore, all these factors mean that the European Central Bank (ECB) will likely continue cutting interest rates on Thursday. It hopes that these rate cuts will help to supercharge the economy.

South African rand on edge

The South African rand has eased slightly in the past few months. The USD/ZAR exchange raterose from 17.04 in October to a high of 18.40 in November.

There is a likelihood that the USD/ZAR exchange rate will rise as the political union between ANC and DA appears shaky. DA has threatened to quit the government if Cyril Ramaphosa fires ministers affiliated with the party.

Such a move will put the country at risk of political chaos since the ANC will not have the majority it needs to form the government. It will also affect the rising business and consumer confidence in the country. That will, in turn, affect the South African rand, which has been one of the top-performing currencies in the emerging markets.