Traders' views - Forex

How to trade the Swiss franc

By , 12 Oct 2012

The Swiss franc (CHF), also known as the Swissy, is a major currency. In fact it is the fifth most traded currency in the global markets after the US dollar (USD), euro (EUR), British pound (GBP) and the Japanese yen (JPY).

The CHF is regarded as a hard currency because the Swiss National Bank's (SNB) non-gold reserves are almost five times as high as its gold reserves and the nation has the highest non-gold reserve in the world.

History of the Swiss franc

At the start of the 19th century Swiss currency was unregulated and money in circulation came from many sources including local producers and brought back from mercenaries overseas. This made the monetary system very complicated and for many years Switzerland experienced currency chaos; at one point there were 8000 different coins and notes in circulation.

This came to an end in 1848 when the Swiss Federal Constitution instructed that the issue of money could only come from the federal government. In 1850 the franc officially became the currency of Switzerland. 

In 1865, under the Latin Monetary Union, the Swiss franc along with currencies from France, Belgium and Italy, were valued against a fixed standard of silver and gold. Which meant if the value of silver or gold rose then so did the value of the fixed currencies.

The monetary union ended in 1927 but the Swiss franc remained on the gold standard. The Great Depression had an impact on currencies globally and the Swiss franc was devalued by 30% along with the British pound, US dollar and French franc. In 1945 the Swiss franc joined the Bretton Woods system and was pegged to the US dollar at a rate of 4.305.

Hard currency, but safe haven

As regulation relaxed and globalisation advanced, countries could see the benefit of using a free floating rate over a fixed rate. Unlike other currencies from industrialised nations, the Swissy was backed by gold reserves and until May 2000 the Swiss constitution required currency in circulation to be backed 40% by gold.

This made the currency very stable and attracted foreign investors to the CHF.

After a referendum in 2000 the link to gold ended and in March 2005 Switzerland sold off approximately 25% of its gold reserves. Despite this huge sale Switzerland still has the fourth largest gold reserves in the world behind the EU, IMF and the US.

The CHF is also one of the best known 'safe haven' currencies, which means at times of fear in the global markets investors run from riskier assets/currencies and look for 'safer' investments. Its safe haven qualities derive from Switzerland being one of the last countries to decouple from gold, politically the nation is considered neutral with no wars since 1815 and the SNB maintains a strict policy of price stability.

2011 appreciation and setting a floor

The CHF appreciated in 2011 and in March it rose 4.7% against the USD as investors fled to its safe haven from the fallout of the EU debt crisis. As the crisis continued the CHF continued to rise and in August the franc reached an all time high against the USD, with the USD/CHF rate at 0.7070.

The SNB, unhappy with the overvaluation of their currency, which has a negative effect on trade overseas, intervened in the FX markets by selling large amounts of CHF in an attempt to devalue it. Whilst this worked and USD/CHF rose from 0.7070 to 0.8250 by September, which is a huge move in the markets, the SNB were still not content. With no sign of an economic recovery from the eurozone, hence the risk of CHF becoming overvalued again, the SNB were forced to peg its currency to the euro to protect its export sector.

In September 2011 the SNB set a floor of 1.2000 for the EUR/CHF exchange rate. After the announcement, the CHF weakened and EUR/CHF rate moved from 1.1050 to 1.2150 while USD/CHF moved from 0.7845 to 0.8600.

Since this announcement the EUR/CHF rate has hovered around the 1.20 level until September 2012 where rumors in the market of the SNB raising the floor caused a rally to 1.2180 highs and now the pair remains trading 80 points above the 1.20 floor.

Tips for trading CHF

There are two important factors to consider: the impact of safe haven demand and changes in the SNB monetary policy.

The SNB is historically an active bank and until last month they took the volatility away from the EUR/CHF price but the Swissy appears to be attracting safe haven flow once again which puts pressure on the SNB to intervene. The example in the previous paragraph illustrates just how sensitive the market is to even a sniff of SNB monetary action.

Roughly 80% of Switzerland's economic activity is with the Eurozone, which is why the SNB is mostly concerned about the value of the CHF versus the euro.

To forecast movements in price the key economic reports to monitor are the SNB rate decisions and policy statements, trade balance and inflation data. Also, EU economic data needs to be watched closely because of the close economic ties.

CHF pairs can respond well to technical analysis strategies but note that they tend to be more volatile than the euro because of lower liquidity.

Risk warning: Forex commodities and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. The information provided is for informative purposes only, and can under no circumstances be considered as a recommendation to engage in any trade.  Easy Forex Trading Ltd is regulated by the Cyprus Securities and Exchange commission (CySEC), License Number 079/07. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.

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