The Swiss franc weakened as USD\/CHF extended gains for a seventh session, trading near 0.8190 in European hours on Tuesday, with demand for safe havens easing as US\u2013Iran tensions cooled and crude prices fell. Trade policy also weighed: the Trump administration has rolled out double-digit tariffs on more than 60 countries, including Switzerland, while keeping levies within a previously stated 12.5% ceiling, under an asserted executive legal basis targeting \u201cunjustifiable\u201d, \u201cunreasonable\u201d or \u201cdiscriminatory\u201d practices.<\/p>\n
On monetary policy, the Swiss National Bank is expected to keep its policy rate at 0% through 2027, with negative rates framed as a contingency rather than a base case. Swiss inflation slowed to 0.5% in June and is forecast to peak at 0.8%, remaining within the SNB\u2019s 0% to 2% target band. The US dollar held firm ahead of the Federal Reserve decision on Wednesday, as the CME FedWatch Tool implied nearly a 38% chance of a July hike and, by September, an 81.4% probability of at least a 25-basis-point move; the franc remains closely tied to the euro, with some models putting correlation above 90%, and a past EUR peg removal driving a rise of more than 20% between 2011 and 2015.<\/p>\n
We suggest derivative traders prepare for increased volatility in USD\/CHF as the pair rebounds to around 0.8190 during its seven-day winning streak. With the Federal Reserve policy decision tomorrow, buying short-term USD call options could yield strong returns if the Fed delivers a surprise rate hike. The market currently prices in a 38% probability of a July hike, meaning any aggressive move by Chairman Kevin Warsh will trigger sharp upward momentum for the dollar.<\/p>\n
We recommend utilizing bear put spreads on the Swiss Franc in the coming weeks to capitalize on its weakening safe-haven status. Geopolitical tensions between the US and Iran are cooling, and crude oil prices are falling, which strips the Franc of its typical risk-off premium. Additionally, the Trump administration\u2019s newly implemented tariffs of up to 12.5% on Switzerland will likely pressure the Swiss export economy and weaken the currency further.<\/p>\n
We believe trading the interest rate divergence between the US and Switzerland is the most viable strategy right now. The Swiss National Bank is set to hold its policy rate at 0% through 2027, supported by June inflation slowing to a low 0.5%. Meanwhile, with an 81.4% probability of a US rate hike by September, traders can exploit this gap by using the Franc as a cheap funding currency in derivative carry trades.<\/p>\n\n\n\n