Currency – Swiss Franc (CHF)

education-icon_francSwitzerland enjoys the status of being one of the richest countries in the world. The Swiss Franc is sometimes called the Swissie.

Switzerland’s economic stability and reputation for high quality financial institutions makes its currency, the Swiss Franc, very desirable. The nation also holds an excellent reputation for being a safe haven due to the fact that it has steered clear of global conflicts and did not participate in any of the two world wars. As a result, money flows into the CHF during times of economic or geopolitical uncertainty.

In March 2001, Switzerland rejected accession to the EU despite the fact that its economic policies and practices are generally in line with those of the EU. Despite the fact that its safe haven status has fallen somewhat recently due to the Swiss National Bank intervening in the currency markets in 2011, the Swiss Franc for the time being remains one of the most actively traded currencies.

Swiss National Bank and EURCHF

At the height of the eurozone debt crisis, the Swiss Franc appreciated rapidly due to safe haven demand, prompting the Swiss National Bank (SNB) to intervene in the currency markets on the 6th September 2011 and set a floor on the EURCHF exchange rate, at 1.20 Francs. This meant that the exchange rate could not fall below this set rate otherwise the SNB would be willing to intervene by selling Swiss Francs and buying up Euros in unlimited quantities.

The current massive overvaluation of the Swiss Franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development, said the SNB in a statement following the announcement of the rate cap. Since then, EURCHF traded above 1.20 CHF and has even risen to 1.23 CHF. It is not known how long the SNB will keep the peg in place but as long as the eurozone crisis is ongoing, the 1.20 CHF floor will likely remain in place.

Correlation with Euro

Another important factor for traders to note with regards to the Swiss Franc is its strong correlation with the euro. The USDCHF currency pair has a negative correlation with the EURUSD currency pair. This means that if EURUSD is falling, USDCHF is likely to be rising.

It is helpful to understand this strong negative correlation and to take it into account when considering trades in both currency pairs. As both currency pairs have such a high negative correlation, there is a very good chance that if a trader’s technical analysis will lead to a buy signal in the EURUSD, it could at the same time lead to a sell signal for USDCHF, or vice versa.

If traders were unaware of the negative correlation we have just described, they may think that they are placing two completely different trades. If these pairs were traded in the same manner, they would effectively be decreasing the effect of both trades, as the negative correlation between the two currency pairs would offset any gains or losses that were achieved on each trade.

Remember that this negative correlation can at times break down depending on the Swiss political and/or economic environment and if it begins to substantially deviate from that of the eurozone. The reason for the correlation of the Swiss Franc with the Euro is due to strong economic links between Switzerland and the European Union.

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