Currency Profile Swiss Franc (CHF)
Introduced in 1850, the Swiss franc (CHF) is the official currency of Switzerland, Liechtenstein and the Italian exclave of Campioned’Italia, and is the only franc remaining in Europe.
The central bank of Switzerland, Swiss National Bank (SNB), issues the Swiss franc banknotes, which come in six denominations: 10 francs, 20 francs, 50 francs, 100 francs, 200 francs and 1,000 francs. CHF is subdivided into 100 units, with a hundredth of the Swiss franc called Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian, and rap (rp.) in Romansh. Swiss franc coins are issued by the federal mint, called Swissmint, in seven denominations: 5 centimes, 10 centimes, 20 centimes, 1⁄2 franc, 1 franc, 2 francs, 5 francs.
Swiss franc coins and banknotes
Swiss Franc is Hard currency and used as a reserve currency in the world. All banknotes are displayed all information in the four national languages which are German, French, Italian and Romansh. Respecting the same reason, all Swiss coins are language-neutral and feature with only numerals. Currently in circulation coins are in denominations of 5, 10 & 20 centimes, ½, 1, 2 & 5 francs, banknotes are in denominations of 10, 20, 50, 100, 200 & 1,000 francs.
Important Characteristics of the Swiss Franc
- Safe haven status This is perhaps the most unique characteristic of the Swiss franc. Switzerland’s safe haven status is continually stressed because this and the secrecy of the banking system are the key advantages of Switzerland. The Swiss franc moves primarily on external events rather than domestic economic conditions.
- Swiss franc is closely correlated with gold Switzerland is the world’s third largest official holder of gold. In the past, a Swiss constitutional mandate required the currency to be backed 40% with gold reserves. The mandate is now removed but the positive correlation between the Swiss franc and gold remains because CURRENCY PROFILE: SWISS FRANC (CHF) 235 the relationship has been engrained into the minds of forex traders; therefore, both gold and the Swiss franc are perceived as safe haven instruments.
- Carry trades effects With one of the lowest interest rates in the industrialized world, over the past few years, the Swiss franc has become one of the most popular funding currencies for carry trades. A carry trade involves buying or lending a currency with a high interest rate and selling or borrowing a currency with a low interest rate. With CHF having one of the lowest interest rates of all industrialized countries, it is one of the primary currencies sold or borrowed in carry trades. This results in the need to sell CHF against a higher yielding currency.
- Interest rate differentials between euro Swiss futures and foreign interest rate futures are closely followed. One of the favorite indicators of professional Swiss franc traders is the interest rate differential between three-month euro Swiss futures and eurodollar futures. These differentials can provide guidance on potential money flows as they indicate how much premium yield U.S. fixed-income assets are offering over Swiss fixed-income assets, or vice versa.
- Potential changes in banking regulations. Over the past few years members of the European Union have been exerting significant pressure on Switzerland to relax the confidentiality of their banking system and to increase transparency of their customers’ accounts. The European Union is pressing this issue because of its active measures to persecute EU tax evaders. This should be a concern for many years to come. However, this is a difficult decision for Switzerland to make because the confidentiality of their customers’ accounts represents the core strength of their banking system. The EU has threatened to impose severe sanctions on Switzerland if they do not comply with their proposed measures. Both countries are currently working to negotiate an equitable resolution. Any news or talk of changing banking regulations will impact both Switzerland’s economy and the Swiss franc.
- Mergers and acquisition activity Switzerland’s primary industry is banking and finance. In this industry, merger and acquisition activities (M&A) are very common, especially as consolidation continues in the overall industry. As a result, these M&A activities can have significant impact on the Swiss franc. If foreign firms purchase Swiss banks or insurance companies, they will need to buy Swiss francs and in turn, sell their local currency. If Swiss banks purchase foreign firms, they would need to sell Swiss francs and buy the foreign currency. Either way, it is important for Swiss franc traders to frequently watch for notices on M&A activity involving Swiss firms.
- Trading behavior, cross currency characteristicThe EURCHF is the most commonly traded currency for traders who want to participate in CHF movements. USDCHF is less frequently traded because of its greater illiquidity and volatility. However, day traders may tend to favor USDCHF over EURCHF because of its volatile movements. In actuality, the USDCHF is a synthetic currency derived from EURUSD and EURCHF because more transactions are done between the euro and Swiss franc. Market makers or professional traders tend to use those pairs as leading indicators for trading USDCHF or to price the current USDCHF level when the currency pair is illiquid. Theoretically, the USDCHF rate should be exactly equal to the EURCHF rate divided by EURUSD.
Important Economic Indicators for Switzerland
Economic data from Switzerland tends to have limited impact on the currency, but these are the most important pieces of Swiss data.
KoF Leading Indicators
The KoF leading indicators report is released by the Swiss Institute for Business Cycle Research. This index is generally used to gauge the future health of the Swiss economy. It contains six components: (1) change in manufacturers’ orders; (2) the expected purchase plans of manufacturers over the next three months; (3) the judgment of stocks in wholesale business; (4) consumer perception of their financial conditions; (5) backlog in the construction sector; and (6) orders backlog for manufacturers.
Consumer Price Index
The Consumer Price Index is calculated monthly, on the basis of retail prices paid in Switzerland. In accordance with prevalent international practice, the commodities covered are distinguished according to the consumption concept, which includes in the calculation of the CPI of those goods and services that are part of the private consumption aggregate according to the National Accounts. The basket of goods does not include transfer expenditure such as direct taxation, social insurance contributions, and health insurance premiums. The index is a key measure of inflation.
Gross Domestic Product
GDP is a measure of the total production and consumption of goods and services in the Switzerland. GDP is measured by adding expenditures by households, businesses, government, and net foreign purchases. The GDP price deflator is used to convert output measured at current prices into constant-dollar GDP. The data are used to gauge where in the business cycle Switzerland finds itself. Fast growth often is perceived as inflationary, while low (or negative) growth indicates a recessionary or weak growth period.
Balance of Payments
Balance of payments is the collective term for the accounts of Swiss transactions with the rest of the world. The current account is the balance of trade plus services portion. BoP is an important indicator for Swiss traders, as Switzerland has always kept a strong current account balance. Any changes to the current account, positive or negative, could see substantial flows.
Production Index (Industrial Production)
The production index is a quarterly measure of the change in the volume of industrial production (or physical output by producers).
Switzerland’s retail sales report is released on a monthly basis 40 days after the reference month. The report is an important indicator of consumer spending habits and is not seasonally adjusted.