The Swiss franc (CHF) is the local currency of Switzerland and is a popular currency among traders and in global transactions. The USD/CHF is also one of the so-called currency majors. This article will look at the fundamentals you should have in mind when trading the Swiss franc.
Economic profile of Switzerland
Switzerland is a relatively small country that has a population of more than 8.4 million people. It is also one of the wealthiest countries in the world. It has a combined GDP of more than $678 billion, making it the 20th biggest economy in the world. It has a GDP per capita of more than $86,000, ranking it at position two after Luxembourg.
There are several reasons that explain the country’s wealth and the Swiss franc stability. First, its location plays an important role in facilitating trade. The country is surrounded by countries like Germany, France, and Italy, which are the biggest economies in the region. This helps its exports and imports industry. Second, while Switzerland is not a member of the European Union, it has a deal that excludes tariffs for its goods.
Third, Switzerland is often seen as a neutral country on many issues. That has made it a safe country that is under little threats from some of the biggest Western foes like Russia, Iran, and North Korea. As such, the Swiss franc is often seen as a safe-haven currency. Also, many wealthy people prefer storing their wealth in the country’s leading banks. The best known of them are UBS, Credit Suisse, and Raiffeisen Switzerland.
Fourth, the country has a well-educated population with advanced knowledge of science and technology. This has made it a favourite hub for many foreign companies. Its local companies like Novartis, Vitol, and Trafigura have a strong market share in their industries.
Most importantly, unlike most countries in Europe, Switzerland has its own central bank that is responsible for setting monetary policy. As such, it can easily tweak policy when situations change. For example, the German Central Bank cannot cut or raise interest rates since this decision can only be made by the European Central Bank (ECB).
Top Swiss franc currency pairs
There are several high-liquidity Swiss franc currency pairs that you can day trade. The most popular one is the USD/CHF, which is classified as a major currency. It is popular for several reasons.
First, the US and Switzerland do a lot of trade. According to the US Trade Representative (USTR), the trade between the two countries totalled more than $134 billion in 2020. As such, the overall flows tend to have an impact on the exchange rate.
Second, the two countries tend to have a divergent monetary policy stand, making the pair a perfect instrument for carry traders. This is a strategy that involves borrowing in a low-interest-rate environment and investing in one with higher yields. This strategy has worked well for years since the Swiss National Bank (SNB) has left interest rates negative for more than a decade.
Finally, the USD/CHF is popular because of its role as a major currency, meaning that it is provided by most brokers.
The other popular pair is the EUR/CHF. The pair has become more prevalent since 2015 when the SNB decided to abandon its peg on the currency. It is also a popular pair because of the large trade between Switzerland and the EU. Indeed, Switzerland is the fourth biggest trade partner of the EU while the EU buys most of Swiss goods and services.
Other popular Swiss franc pairs are the GBP/CHF and CHF/JPY because of the large trade flows between Switzerland and the UK and Japan.
Swiss National Bank
The Central Bank plays an important role when doing a fundamental analysis of a currency. Indeed, it is often more important than elected politicians because it has the power to print money and set interest rates.
The SNB is different from other central banks like the Federal Reserve and the European Central Bank (ECB). For one, the Central Bank is a publicly-traded central bank that is listed in the local Swiss exchange. As such, its investors follow its performance very closely. The bank makes its money primarily by investing in local and foreign companies. It owns large stakes in companies like Apple, Microsoft, Amazon, and Facebook.
The bank meets several times a year and makes a decision on interest rates. To do this, the bank looks at the overall health of the economy. In this, it looks at key numbers like:
- Employment data. The bank looks at the overall trend of the labour market and makes its decision accordingly. For example, the bank pushed interest rates further negative during the pandemic.
- Inflation. It looks at the data released by the statistics agency and adjusts the economy. It has an inflation target of 2.0%.
- Manufacturing and services sector. The bank looks at the performance of the two sectors to gauge the performance of the economy.
- Retail sales. It also looks at the performance of the retail sector, which is a leading employer in the country.
Other numbers it looks at are GDP and industrial production.
Top fundamental characteristics of the Swiss franc
There are several peculiarities of the Swiss franc that you should have in mind. These are:
- Safe haven. The franc is viewed as a safe haven. As such, the currency tends to gain against several currencies during periods of crisis.
- Carry trade. The currency is viewed as a good asset to carry trade because the SNB has left rates negative for so long.
- Correlation with gold. The Swiss franc tends to have a close correlation with gold because of its safe-haven characteristics.
Summary
The Swiss franc is a unique currency that is also loved by many traders. In this article, we have looked at the special characteristics of Switzerland and what makes it unique. We have also looked at the structure of the Swiss National Bank (SNB) and the top characteristics of the franc.
