The Swiss franc (CHF) is one of the major currencies traded on the foreign exchange market. As the official currency of Switzerland, the Swiss franc has a reputation for being a safe haven currency along with the Japanese yen and U.S. dollar. This comprehensive guide will provide forex traders with key background, historical overview, trading tips, and analysis regarding the Swiss franc.
Introduction to the Swiss Franc
The Swiss franc serves as the official currency for Switzerland and Liechtenstein. The currency code is CHF and the currency symbol is Fr. which stands for the French term “franc suisse.”
Switzerland is renowned for its neutrality, stability and banking secrecy laws which have contributed to the Swiss franc’s status as a safe haven currency. With around $630 billion in foreign exchange reserves, the Swiss National Bank has resources to intervene in currency markets when needed.
Some key facts about the Swiss franc:
- Issued by the Swiss National Bank (SNB)
- The smallest note denomination is 10 francs
- Pegged to gold until 2000
- Considered a safe haven currency
- Sometimes used as a funding currency
The Swiss franc is managed by the Swiss National Bank (SNB). The SNB has policies aimed at providing economic stability for Switzerland and can intervene directly in forex markets as needed.
History of the Swiss Franc
The usage of the franc currency traces back to the 1500s. It became the official currency of Switzerland in 1798. Unlike most currencies, the Swiss franc was historically based on a silver standard.
From 1850 to 1870, Switzerland used both silver and gold coins interchangeably along with banknotes. In the 1870s, Switzerland transitioned to a gold standard for its currency at a rate of 4,475 Swiss francs per kilogram of gold.
After World War I, Switzerland returned to a modified silver and gold standard for its currency where 1 Swiss franc equalled 290.323 milligrams gold or 5 grams silver.
In 1936, Switzerland left the silver standard and maintained its link between the franc and gold until May 2000 when the link was abolished. For the most part, the Swiss franc trades on a free-floating exchange rate but the SNB does still actively intervene at times to prevent violent fluctuations.
Some key events for the Swiss franc:
- 1798 – Franc introduced as the official currency
- 1925 – Established as legal tender nationwide in Switzerland
- 2011 – Peg to the euro abandoned as the franc surges
- 2015 – Unpegging from euro and negative interest rates
Historically, the Swiss franc has served as a relative safe haven from political instability and war due to Switzerland’s renowned neutrality. However, the end of the gold standard did eliminate one of the key pillars providing stability for the currency.
Why Trade the Swiss Franc?
There are several key reasons why Forex traders pay attention to the Swiss franc in their trading.
Safe Haven Appeal
The Swiss franc serves as a traditional safe haven investment along with the U.S. dollar and Japanese yen. During times of geopolitical tensions or market crashes, investors often flock to the Swiss franc viewing Switzerland as neutral and stable.
Limited Supply
Unlike currencies such as the U.S. dollar, the Swiss National Bank has a tight control over the supply of the Swiss franc. This limited and regulated supply helps provide underlying support for the currency’s value.
Use as a Funding Currency
With Switzerland’s low interest rates, the franc is often used as a funding currency to invest in higher yielding assets worldwide. Traders must account for this flow when analyzing the franc.
Highly Liquid Market
The Swiss franc has very high liquidity in the forex market. Traders can move in and out of franc positions with tight spreads and little concern over slippage.
Intervention Risk
The SNB has actively intervened in currency markets including pegging the franc or using negative rates. Traders must account for potential sudden policy changes.
For both technical traders and macro fundamentalists, the Swiss franc provides opportunities but also requires caution around potential central bank manipulation.
Swiss Franc in Forex Trading
The Swiss franc is considered to be the 6th most traded currency worldwide. The franc is commonly traded against these major currencies:
- EUR/CHF – Euro
- USD/CHF – U.S. Dollar
- GBP/CHF – British Pound
- CAD/CHF – Canadian Dollar
- AUD/CHF – Australian Dollar
- NZD/CHF – New Zealand Dollar
For European traders, the EUR/CHF is often one of the most actively traded crosses. Switzerland’s close ties to the Eurozone economy make this pairing very volatile.
USD/CHF is also widely followed by traders globally as a major pairing between safe haven currencies. Movement in these crosses tends to follow periods of risk sentiment and volatility closely.
Factors that Influence the Swiss Franc
Many macro fundamental factors can impact the value of the Swiss franc similar to other major currencies:
Swiss National Bank Policy
The SNB has actively manipulated the Swiss franc at times to achieve monetary policy goals by pegging its value or utilizing negative interest rates. SNB policy announcements or interventions can cause big moves.
Eurozone Economic Data
With close trade ties to Europe, Swiss franc crosses are heavily influenced by Eurozone economic data including GDP growth, inflation, and output.
Safe Haven Flows
In times of volatility, the franc tends to spike as investors pile into the traditional safety of Switzerland. Geopolitics, stock market crashes, or high risk events can all trigger safe haven bids.
Interest Rate Differentials
With Switzerland maintaining low interest rates, the interest rate differences between the franc and other currencies impacts prices.
Overall Risk Appetite
During periods of improving risk appetite, the franc tends to weaken as investors shift to higher yielding assets outside of Switzerland.
Fundamental traders can focus on both Swiss and overall global monetary policy as well as risk sentiment to find opportunities in trading the franc.
Trading the Swiss Franc in Times of Crisis
One of the most pronounced traits of the Swiss franc is its “safe haven” status attracting investors during volatile times. Here are some tips for trading the Swiss franc during market crisis periods:
- Watch for spikes higher in the franc crosses as volatility erupts
- Fade short-term spikes in the franc when they become extreme
- Scale into long franc positions as fear intensifies
- Monitor Gold prices which often move in tandem with the franc
- Consider options to limit downside risk on franc longs
- Look for eventual unwinding of franc positioning on short-term rebounds
When volatility strikes, the Swiss franc will often be one of the best performing major currencies in the Forex market. Traders can monitor crosses such as EUR/CHF and USD/CHF for opportunities when panic sets in.
Carry Trading with the Swiss Franc
For many years up until the financial crisis, the Swiss franc was one of the most popular funding currencies for carry trades because of Switzerland’s persistently low interest rates.
With the franc yields low, traders would borrow francs and invest proceeds into higher yielding currencies and assets. This carry trade strategy was profitable with the franc remaining subdued.
However, in times of market selloffs, panicked unwinding of carry trades can result in huge spikes in the Swiss franc exchange rate. Traders were burned in the 2008 and 2011 selloffs as short franc carry trades suffered large losses.
If engaging in carry trades using the Swiss franc, traders should:
- Choose only the highest yielding currencies
- Monitor volatility and risk metrics closely
- Reduce position size and use stop losses
- Hedge exposure using options structures
The risks of carry trading was apparent during the “Francogeddon” event in January 2015 when the SNB unexpectedly abandoned its EUR/CHF 1.20 peg resulting in a 30%+ spike in EUR/CHF and large losses for carry traders.
Trading the Swiss Franc in Range-Bound Markets
During calmer market environments, the Swiss franc can remain locked in relatively tight trading ranges for extended periods.
When volatility declines and ranges persist, some effective strategies include:
- Selling the range extremes with limit orders
- Using pending orders around key levels
- Buying dips and selling rallies using range oscillators
- Using moving average crossovers for range signals
- Scaling into breakout trades if ranges are breached
Monitoring historical support and resistance levels along with Bollinger Bands® and other range indicators can highlight trading opportunities during low volatility periods in the Swiss franc.
Is the Swiss Franc Still a Safe Haven Currency?
In early 2015, the SNB sent shockwaves through the currency market by suddenly lifting its cap on EUR/CHF 1.20 which had restricted the franc’s upside. The Swiss franc surged higher immediately.
This led to questions on whether the franc still deserved its safe haven status given how it was artificially suppressed. However, in times of panic, the franc still tends to outperform other major currencies.
Its smaller size and limited supply means the franc can rapidly appreciate when fear sets in. This was apparent in March 2020 at the onset of the COVID pandemic when the franc rallied sharply versus rivals.
While SNB intervention does create an asterisk regarding the franc’s safe haven credentials, its underlying support remains during crises. Monitoring SNB policy shifts is key.
Impact of Negative Interest Rates
As part of its monetary policies, the SNB introduced negative interest rates in 2015 which means depositors must pay interest for parking funds in the country. This policy reduces appeal of the franc.
By making holding Swiss francs uncomfortable, this technique discourages inflows and stimulates investment outside Switzerland’s borders into higher yielding options.
Traders must monitor rate announcements as the SNB tweaks negative rates up or down to control franc appreciation. Higher negative rates are designed to cap the franc’s upside.
Outlook and Forecast for the Swiss Franc
Given Switzerland’s neutral political climate and stable economy, the Swiss franc’s safe haven status appears solid currently amid heightened geopolitical tensions in 2022 and 2023.
However, with Swiss rates deeply negative at -0.75%, the SNB has tools in place to dampen appreciation and guard against deflation risks. Intervention remains possible if the franc strengthens too quickly.
Much depends on the SNB’s approach in coming years as well as the outlook for the Eurozone economy and monetary policy shifts from the ECB.
Near-term, the Swiss franc may face headwinds if risk appetite improves and volatility declines. But its gains could be swift if market uncertainty intensifies. Agile traders can react in either environment.
Key Takeaways on Trading the Swiss Franc
A few key points for traders on the Swiss franc:
- Watch for volatile reactions as a safe haven currency during crises
- Monitor SNB policy closely for signs of intervention
- Use options to hedge downside risks on safe haven rallies
- Look for reversion trades after extreme spikes
- Range trade during periods of low volatility
- Account for risks of carry trades being unwound
While not a pure free-floating currency, the Swiss franc continues to offer opportunities for traders who understand its biases and hedge against potential manipulation risks.
Conclusion
The Swiss franc has earned its reputation as a safe haven currency due to Switzerland’s economic and political stability. However, with central bank intervention, traders must remain nimble with CHF crosses.
Monitoring both technical price levels and macro Swiss fundamentals around monetary policy and the Eurozone economy will be key to trading the Swiss franc effectively. Its safe haven attributes will still make it a popular target when volatility erupts.
With proper risk management, Forex traders can find success trading the Swiss franc across market environments while avoiding the pitfalls the currency also presents.
