Insights 
VT 
Fed Expectations And Swiss Developments
Expectations of further easing by the Fed remain, with a 95% chance of a 25-basis-point rate cut in October and an 80% chance in December. The FOMC Minutes, due later, may reveal more on policymakers’ views. In Switzerland, a rising unemployment rate and disinflation have sparked speculation that the SNB might consider negative interest rates again, placing pressure on the Swiss Franc (CHF).
A heat map displays currency changes, with discrepancies noted between base and quote currencies like the Swiss Franc and US Dollar. The CHF showed differing strengths against other currencies, demonstrating sector volatility.
We see the US Dollar holding firm against the Swiss Franc, pushing USD/CHF above the 0.8000 level. This strength is primarily a safe-haven response to the ongoing US government shutdown, now in its second week. However, we must be cautious as this political-driven demand for the dollar is likely temporary.
Looking at historical precedent from the perspective of 2025, the 35-day shutdown in 2018-2019 showed a similar pattern where the dollar initially strengthened before economic reality set in. We should anticipate that the longer this stalemate continues, the more it will weigh on the US economy and ultimately the dollar. This situation pressures the Federal Reserve to act more dovishly.
Potential Market Reactions
The market is currently pricing in a 95% chance of a Fed rate cut in October, according to the CME FedWatch tool. This high probability will act as a significant cap on any further USD strength in the coming weeks. We believe options strategies should therefore account for a potential ceiling on the dollar’s rally.
On the other side of the currency pair, the Swiss Franc is facing its own headwinds from speculation that the Swiss National Bank (SNB) will cut rates back into negative territory. The recent rise in Swiss unemployment to 3.0% and a monthly CPI drop of 0.2% are serious warning signs for the SNB. We must remember the SNB held rates negative from 2015 until September 2022, showing they are not afraid to use this tool to weaken the franc.
Given these opposing forces, traders should consider derivative strategies that capitalize on a continued, but limited, rise in USD/CHF. A bullish call spread is a viable option, as it allows for profit from upward movement while defining the risk should the shutdown end abruptly or the Fed’s stance become clearer. This strategy balances the clear weakness in the Swiss Franc against the uncertain, capped strength of the US Dollar.
