Switzerland was founded in 1291 and is located in the middle of western Europe and shares much of its history and culture with Germany, Austria, Italy, and France.
Although being right smack in the middle of Europe, Switzerland is not part of the European Union. While there were talks between the EU and Switzerland in the mid 1990s, the Swiss public rejected the proposal to be part of EU. Since then, Switzerland has maintained its economic independence.
Switzerland is considered to be a small country, but let us tell you that it is PACKED! It has a population of about 7.78 million, with around 477 people per square mile.
Switzerland is also known for its neutrality as it has refrained from participating in either of the two World Wars.
Switzerland: Facts, Figures, and Features
- Neighbors: Germany, France, Italy, Austria
- Size: 15,940 square miles
- Population: 7,954,700
- Density: 477.4 people per square mile
- Capital City: Bern
- President of the Swiss Confederation: Didier Burkhalter
- Currency: Swiss Franc (CHF)
- Main Imports: Machinery and transport equipments, medicinal and pharmaceutical products, other chemicals, manufactured goods
- Main Exports: Chemicals, clocks and watches, food, instruments, jewelry, machinery, pharmaceuticals, precious metals, textiles, Rolex, Roger Federer
- Imports Partners: Germany 26.19%, Italy 10.46%, France 8.4%, United States 6.08%, China 5.75%, Austria 4.4%
- Exports Partners: Germany 18.5%, United States 11.61%, Italy 7.61%, France 6.96%, United Kingdom 5.67%
- Time Zones: GMT + 1
- Website: http://www.switzerland.com/en.cfm/home
Switzerland is one of the richest countries in the world in terms of per capita income (that’s total GDP divided by the country’s population).
In 2010, it produced $529.9 billion in total output. As small as it is, on a per person basis, it boasts of a GDP of $46,815, which is seventh highest in the world.
Its main trading partners are Germany, the U.S., France, Italy, Austria, Russia, and the U.K. Like Japan, Switzerland is also highly dependent on its exports, which make up about $308.3 billion or 58.2% of its GDP.
Switzerland’s main industries are machinery, chemicals, textiles, precision instruments and watches. Don’t laugh at that last one – it actually comprises a decent chunk of Switzerland’s output! Anyway, it’s time to move on!
Monetary & Fiscal Policy
The Swiss National Bank (SNB), which is presently chaired by Mr. Thomas Jordan, conducts the nation’s monetary policy by influencing the country’s monetary and credit conditions.
The Governing Board, which is responsible for determining the bank’s policies, consists of 3 members – the Chairman, Vice Chairman, and a third member. That’s right – only three people are part of the board!
Unlike most central banks, the SNB sets a target range for its desired interest rate (also called Libor) rather than a fixed figure for three months.
On top of its purpose to control the country’s money supply and influence interest rates, the SNB has a more on-hand role in keeping the CHF’s valuation stable.
An excessively strong CHF could cause inflation to spike and could also undermine the country’s exports. With Switzerland’s strong reliance on their exports, the SNB, favors a weaker CHF and does not hesitate to intervene in the forex markets to weaken it.
One of the major monetary policies of the SNB is inflation targeting. The bank’s inflation target, which is monitored in the CPI, is below 2% a year.
The bank will then attempt to influence the country’s actual inflation rate through open market operations and by adjusting the Libor rate.
Speaking of open market operations, the bank influences the Libor rate through short term repurchase (repo) transactions. A repo transaction involves selling of a particular security for cash and agreeing to repurchase the same security at a later date.
If the interest rate in the open market rises over the SNB’s desired band, the central bank will supply the other banks with more liquidity through repo operations at lower repo rates.
On the other hand, the SNB can reduce liquidity by increasing the repo rate, eventually increasing the Libor rate as well.
On the fiscal side, one attractive fiscal policy that Switzerland has is that they have some of the lowest tax rates among developed nations. In fact, it is often referred to as a “tax haven” nation.
Corporate tax rates in Switzerland run from 8.5% to 10.0%. This, in addition to its bank secrecy laws, make Switzerland one of the most business-friendly nations in the world.
Getting to Know the CHF
Not too long ago, France, Belgium, and Luxembourg also termed their currencies as francs… until they adopted the cooler euro, that is. At present, Switzerland is the only one using the franc as its currency, the Swiss Franc (CHF).
Among financial geeks, the Swiss Franc is known as the “Swissy”.
Thanks to Switzerland’s neutrality…
Switzerland is considered to be politically neutral due to its bank secrecy laws, giving the CHF a “safe haven” status as well. Usually, during times of economic uncertainty, investors move their funds into Switzerland, causing the CHF to gain in value.
I’m still stuck in the bling-bling era!
Not only do the Swiss refuse to join the “cool kids” of the EU, but they are also the only country that still adheres to a gold standard.
About 25% of the country’s money is backed with gold reserves, giving the CHF an 80% correlation with the price of gold. This means that whenever the price of gold rises, the CHF could stand to benefit as well.
Important Economic Indicators for the CHF
GDP – The Gross Domestic Product (GDP) is the measure of the country’s total value of all final goods and services. The report gauges the change in the economy’s total output from the previous period.
Retail sales – The headline retail sales report measures the monthly change in the total value of sales at a retail level.
Consumer Price Index (CPI) – The CPI measures the change in the prices of a basket of goods and services. The CPI is followed closely by the SNB, as it uses the report to help in its inflation analysis.
Balance of Trade – The balance of trade measures the total difference in value between exported and imported goods in the country. Switzerland has a very robust export industry so traders often use the country’s trade balance to measure how well the economy is faring.
What Moves the CHF
Price of Gold
As mentioned earlier, the CHF has an 80% correlation with the price of gold, as 25% of Switzerland’s cash is backed with gold reserves. When gold prices go up, the CHF usually goes up as well. Conversely, when gold prices slide, the CHF likewise declines.
Developments in the Euro Zone and the U.S.
Since Switzerland is an export-dependent country, it is vastly affected by the economic development of its major trading partners in the euro zone and the U.S. Switzerland’s major export partners in the euro zone are Germany (21.2%), France (8.2%), Italy (7.9%), and Austria (4.5%).
The U.S., meanwhile, takes about 8.7% of Switzerland’s exports. Poor economic performance in any of these countries could mean less business for Switzerland.
Sortin’ Out the Rough Edges
Political tension in its neighbors in Europe, particularly in the euro zone, could cause traders to seek the safety of the Swissy.
Remember that the euro zone is a brood of 16 states with the ECB directing and implementing a set of monetary policies for the entire group.
Given that the economies of the member-countries grow at different paces, ECB policies sometimes go against what a single nation needs at that specific time.
USD/CHF is also affected by the cross exchange rates like EUR/CHF. A jump in the EUR’s valuation due to a hike in the ECB’s interest rate, for example, could spill the Swissy’s weakness onto other currency pairs like USD/CHF.
Merger and Acquisition (M&A) Activities
Switzerland’s main industry is banking and finance. Merger and acquisition (M&A) activities, or simply the buying and selling of firms, are very common.
How can this affect the spot prices of the CHF?
For example, if a foreign firm wishes to acquire a business in Switzerland, it will have to pay for it using CHF. On the other hand, if a Swiss bank, for example, wishes to purchase a US firm, it will then have to dump its CHF for the USD.
USD/CHF is traded in the amounts denominated in USD. Standard lots sizes are $100,000 while mini lot sizes are $10,000.
The pip value, which is denominated in CHF, is calculated by dividing 1 pip (0.0001) by USD/CHF’s rate.
Profit and loss are denominated in Swiss francs. For one standard lot position size, each pip fluctuation is valued at 10 CHF. For one mini lot position size, each pip fluctuation is worth 1 CHF. To illustrate, if the prevailing market rate of USD/CHF is 1.0600 and you want to trade one standard lot, then one pip would be equivalent to 9.4340 USD.
Margin calculations are typically in USD. At 100:1 leverage, you need $1,000 to control 100,000 units of USD/CHF.
USD/CHF Trading Tactics
The Swissy pairs (USD/CHF and EUR/CHF) are usually active during the European trading session only. Both currency pairs tend to be range-bound most of the time. Given this, they are mostly susceptible to sudden spikes and breakouts.
As we mentioned earlier, the SNB is very much keen on monitoring the valuation of the Swissy. It is notoriously known to intervene in the forex market to weaken the CHF especially when it reaches some historical key levels.
For example, if USD/CHF falls back to its yearly low due to an increase in risk appetite, the SNB could just be lurking around to push the pair back higher.
You could also trade the Swissy by monitoring the economic fundamentals of its major trading partner, the euro zone. Any economic or political tension in the euro zone could lead investors back to the safety of the Swissy.
Given this, currency crosses like EUR/CHF could also be used to trade, for example, the USD/CHF. A rate hike by the ECB which boosts EUR/CHF could also spill over on USD/CHF.