USD/CHF snapped a three-day rise and traded near 0.7910 in Asian hours on Thursday as the US Dollar softened on reduced risk aversion after Israel and Lebanon agreed on Wednesday to renew a ceasefire, subject to a “complete cessation” of fire by Iran-backed Hezbollah. The deal followed US-led talks in Washington, and the two sides—despite having no formal diplomatic relations—also agreed to set up “pilot security zones” where the Lebanese armed forces would take exclusive control “to the exclusion of all non-state actors”.
Further downside in the pair was framed as potentially limited by firmer expectations for a Federal Reserve rate rise this year after stronger US labour indicators, including May ADP private payrolls and JOLTS job openings. With the war in Iran continuing to disrupt energy markets, higher oil prices have added to inflation concerns and pushed pricing towards a more hawkish path, with the CME FedWatch Tool indicating a nearly 42% probability of a December hike. Separately, SNB Chairman Martin Schlegel said the Swiss Franc’s real overvaluation is lower than its nominal overvaluation and that the central bank has increased its readiness to intervene in FX markets.
Central Bank Policy Versus Geopolitical Risk
We see the current situation in USD/CHF as a standoff between central bank policy and geopolitical risk. The ceasefire news has temporarily weakened the US Dollar, but we believe the underlying support for the dollar remains strong. Therefore, any dip in the pair towards the 0.7900 level should be viewed with caution by those holding short positions.
The US Federal Reserve’s position is becoming increasingly clear, and we must trade accordingly. Recent data continues to show a robust labor market, with the latest Non-Farm Payrolls report indicating the economy added 272,000 jobs, far exceeding expectations. This persistent economic strength makes a Fed interest rate hike later this year a very real possibility, which will act as a tailwind for the US Dollar.
On the other side, the Swiss National Bank (SNB) has signaled it is ready to intervene to stop the Franc from getting too strong. The SNB has a history of dramatic market interventions, and their recent shift in tone suggests they are more concerned with Franc strength than with inflation. This threat of intervention puts a potential floor under the USD/CHF pair in the coming weeks.
Trading Opportunities and Market Outlook
Given these opposing forces, we expect volatility to increase. The ceasefire agreement seems fragile, and any renewed conflict would trigger safe-haven buying of the Franc, pushing USD/CHF down sharply. For this reason, we are considering buying long strangles, which involves purchasing an out-of-the-money call and put option to profit from a large price move in either direction.
However, we believe the path of least resistance is upwards due to the powerful combination of a hawkish Fed and a dovish SNB. The current low levels around 0.7910 present an attractive entry point for long positions. We are looking to build a position by buying USD/CHF call options with July expirations to capitalize on a potential rebound driven by central bank divergence.
