The Swiss Franc

The Swiss Franc15.03.2016


Trading on the Forex market is becoming each day increasingly popular. The popularity of the foreign exchange market is influenced by its scale and liquidity, non-stop availability from Monday to Friday, and the possibility of using leverage.

At the same time, Forex is characterized by its high complexity. For effective trading you need to have a store of knowledge about the major currencies, and to take into account not only current indicators, but also other factors having a direct and indirect impact on the exchange rate.

The great important of Switzerland’s position and its currency in the financial world is not a secret for anybody. The Swiss Franc (CHF) is the sixth place considering the popularity rating of world currencies, despite the fact that the Swiss economy is on the 19th position in the world in terms of GDP. The Swiss currency is not a part of the world's reserve currencies, despite the commitment of Switzerland to the conservative approach to the economy and exceptional rationality in finance.

Code: CHF

Symbol: Fr or SFr.

Banknotes: 10, 20, 50, 100, 200 and 1000 francs

Coins: 5, 10 & 20 centimes, 1⁄2, 1, 2 and 5 francs

The Swiss currency is controlled by the Swiss National Bank. This institution strongly supports the reputation of a sober and conservative approach to managing the economy. For example, the target threshold for inflation was set by SNB within 2%.

Economy of the Swiss Confederation

The role of the Swiss economy in the global banking community can hardly be overestimated. More than 11% of GDP of this small Alpine country falls on the share of financial services. The neutral status of the state and a clear policy on the preservation of bank secrecy has led to the fact that Switzerland has acquired the status of a popular direction for the flow of global capital.

It is believed that about 1/3 of the volume of the world's offshore capital is stored in Swiss banks.

Despite all the efforts of the SNB to maintain price stability, economic growth cannot boast stability. During the last 20 years, the country had a negative GDP for 4 times, which fell below 2% y/y. It should be noted that Switzerland has successfully controlled inflation the past few decades, while the ratio of government debt to GDP for several years was managed to keep within 55% range.

In Switzerland, there is a low unemployment rate. Despite the long-term decline in industrial production, the economic sectors such as chemical industry, pharmaceuticals and electrical engineering industry are still highly competitive.

Considering all of the above, the conclusion is that the main driver of the Swiss economy is services, particularly in the field of finance, thanks to which there was developed a high level of per capita income.

Key drivers

Traders should pay attention to indicators such as GDP, industrial production, retail sales, trade balance and inflation. In addition to statistics on employment and interest rates, there should be paid attention to the meetings of the central banks. Actually, you should also keep track of daily news, news of disasters of natural origin, the election and new government decisions. These factors directly affect the exchange rate fluctuations.

The Swiss franc is strongly dependent on the demand for the Swiss services in the field of finance abroad. If there is a period of uncertainty, the stability of the Swiss franc will be higher than that of the euro, the US dollar or the British pound.

Although the turnover volume of CHF is too small to use the Swiss franc as a reserve currency, it is preferred when economic conditions worsen abroad.

Carry-trade

Regarding "carry trade" operations, it should be said that the Swiss franc has often become the object of such speculative actions thanks to its liquidity, stability and low interest rates.

The "carry trade" operations with CHF most often occur against the British pound sterling or euro. Thus, traders useful to monitor the interest rate fluctuations in these regions, because they determine the demand for the franc.

Unique factors

For the Swiss Confederation economy and its currency, the most important factor remains the neutrality of the state. Switzerland is not a member of the Eurozone, preserving this part of its sovereignty untouched, though it is forced to negotiate most of the actions with the EU countries.

The sensitivity of the Swiss economy to that of the neighboring countries is quite low, as the country is the final destination for expatriate capital. Still, a high dependence on the banking sector retains a number of risks for the national economy.

For example, Switzerland was forced to change a few laws on banking secrecy under pressure from the world's key players: the US and Germany. This is a direct cause for concerns for those who would like to keep secret information about their capital. The result of such events may be attempts by other countries, such as Singapore, to occupy the Switzerland niche, becoming an alternative for settling offshore.

In addition, when a trader trades the franc, he should remember that this currency is not particularly dependent on the situation within the country, as with other forex currencies. For example, the dollar, acting as the world's reserve currency, will depend on the economic situation in the United States. Sometimes it seems that the only impact on the Swiss franc quotations may come from the decision on interest rates by the SNB. Probably, the reason for that is a consistent economic policy of the Swiss government and the national bank. At the same time, it is possible that the demand for the franc is high because of its liquidity, reliability and stability.

Conclusion

It is unlikely that Switzerland will go to fundamental changes in its conservative approach to the economy, which is aimed at small growth and a low level of debt. Most likely, the country will try to maintain its role as a key center for banking operations. This means that the Swiss franc will continue to hold its market position quite confident. And since the policy of the Swiss state led to low interest rates, the interest in carry trade will also be maintained. The Swiss franc will also remain among the world's major currencies.

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