The Swiss Franc weakened against the US Dollar on Thursday as the Greenback recovered after a two-day slide. USD\/CHF traded around 0.8080, up nearly 0.35% on the day, after touching an intraday low of 0.8044. Earlier in the week the Dollar had been sold following June CPI and PPI releases that came in below expectations, which reduced the perceived likelihood of an imminent Fed rate increase. Renewed Middle East tensions lifted oil prices, keeping inflation risks in focus and sustaining expectations of a Fed hike later in the year.<\/p>\n\n
CME FedWatch pricing implies a 58% chance of a rate rise by September, which then increases to 65% by October and 76% by December. US data also supported the Dollar: initial jobless claims fell to 208K for the week ending 11 July versus a 217K forecast, while retail sales rose 0.2% month-on-month in June, matching expectations, and May was revised up to 1.0% from 0.9%. The retail sales control group printed 0.5% versus 0.8% in May. The DXY index was near 100.72 after hitting 100.35 on Wednesday, its lowest since 18 June, while the SNB said June conditions were appropriate even as it flagged geopolitical risks and a greater willingness to intervene in FX.<\/p>\n\n
We suggest that derivative traders look to build long positions on the USD\/CHF pair using bull call spreads to capitalize on the rebounding Greenback. With the pair currently hovering near a low of 0.8080, the combination of strong US economic data and rising rate hike expectations creates a clear upward path. This strategy limits our downside risk while allowing us to capture steady gains as the US Dollar regains its footing.<\/p>\n\n
The primary driver behind this US Dollar strength is the sudden shift in Federal Reserve rate expectations, sparked by rising oil prices due to Middle East conflicts. Currently, global energy markets are seeing Brent crude push back toward the $85-per-barrel mark, which historically triggers renewed inflation fears. Because of this, futures markets have quickly priced in a 58% probability of a Fed rate hike by September, rising to a hefty 76% by December.<\/p>\n\n
We also advise against holding long positions on the Swiss Franc because the Swiss National Bank is actively threatening to step into the currency market. Historically, the SNB has not hesitated to use aggressive foreign exchange interventions to weaken the Franc when geopolitical tensions push it too high. Using short CHF knock-out options can help us profit from a sudden SNB intervention while keeping our overall risk strictly defined.<\/p>\n\n
Strong US labor data further supports this bullish USD outlook, with weekly jobless claims recently falling to just 208,000. When US jobs data consistently beats expectations, it historically gives the Fed more room to keep interest rates higher for longer. We believe trading short-term USD call options will allow us to ride this wave of US economic resilience over the coming weeks.<\/p>\n\n\n\n