What to Consider When Trading the Swiss Franc?
One of the most-traded currencies part of the Forex dashboard, the Swiss Franc (CHF), has long been viewed as a safe-haven currency. Switzerland’s neutrality status attracts flows from all over the world, especially from parts of the world where inflation is rampant.
Therefore, people looking to protect their fortunes often send part of it to Switzerland for the long-term. Also, when geopolitical events have negative implications and cause a risk-off move, the CHF is one of the favored destinations.
The first thing to have in mind when thinking of Switzerland is the European Union. It was and remained its main commercial partner, having a special relationship with it.
Changes in the E.U. monetary and fiscal policy space also have an impact on the CHF. The easier way to remain up-to-date with such changes is to closely monitor the EURCHF exchange rate. High volatility on the EURCHF exchange rate points to changes in the macro area between the two economic regions.
Swiss National Bank
The Swiss National Bank (SNB) is one of the most active central banks in the currency markets. Also, it is unique in every way.
First, this is a privately held entity. Second, it has shares listed on the Swiss Stock Exchange. Third, it constantly intervenes to weaken the Swiss Franc.
Therefore, when trading the Swiss Franc, keep in mind that some entity, one with bigger resources, supports a weaker CHF. Moreover, it owns foreign assets, like participation in various companies abroad. This way, it intervenes to weaken the CHF by buying foreign currencies to pay for those participations.
Negative Interest Rates
Another thing that reflects the close ties between the European Union and Switzerland is the overall monetary policy. Both areas have negative interest rates, albeit Switzerland keeps its policy rate to -0.75% while the deposit facility rate in the Euro zone is at -0.5%.
The negative rates affect the swaps paid for holding a long CHF position overnight. In other words, as a trader, if you trade on the bigger timeframes with the expectations of holding the position open for a few months, the negative swap represents a cost that must be considered.
Since the 2008-2009 Great Financial Crisis, the CHF traded with a continuously bid tone. If it were not for the SNB, the EURCHF rate would have probably been much lower.
Keep that in mind next time buying the CHF. The SNB may be on the other side of the trade.