How The Safe Haven Swiss Franc is Profitable for Traders
Category: Financial markets, currencies and Swiss Franc (CHF)
Date: 3 January 2022 In this article we take a more detailed look at the Swiss Franc and why traders like to trade one of the strongest currencies in the world that belongs to a very small country located between European power houses such as Italy, France and Germany.
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The Swiss Franc is a leading global currency that punches above the weight of its domestic economy; Switzerland. Swiss Francs are issued by the Swiss National Bank, rather than the European Central Bank, because Switzerland crucially retained control of its own currency and monetary policy when forming a relationship with the European Union. It is not officially a member state of the EU.
This independence makes Switzerland quite unique among the group of rich, continental European countries that it neighbours with. It has an independent currency which has had a rich history as being a safe haven currency (more on this later).
Traders using MT4 and MT5 platforms have traded currency pairs such as CHF/USD, CHF/EUR and CHF/GBP in high volumes because CHF remains a dominant currency relative to the size of the Swiss economy.
This independence makes Switzerland quite unique among the group of rich, continental European countries that it neighbours with. It has an independent currency which has had a rich history as being a safe haven currency (more on this later).
Traders using MT4 and MT5 platforms have traded currency pairs such as CHF/USD, CHF/EUR and CHF/GBP in high volumes because CHF remains a dominant currency relative to the size of the Swiss economy.
Why do traders and institutions choose to hold Swiss Francs in their currency portfolio?
Switzerland has long held a reputation for banking secrecy and private wealth management firms. Many European citizens and wealthy investors from further afield have trusted Swiss institutions to invest and protect their wealth from losses and prying eyes.
This has naturally led to the Swiss currency playing a large role in financial transactions as it reduces fees to conduct domestic transactions within Switzerland in CHF.
The Swiss Franc also has an image as a ‘safe haven’ currency, which means that the value of the currency is relatively stable against a basket of other currencies. This further entrenches the CHF’s role as a store of liquid wealth for those inside and outside of Switzerland
This has naturally led to the Swiss currency playing a large role in financial transactions as it reduces fees to conduct domestic transactions within Switzerland in CHF.
The Swiss Franc also has an image as a ‘safe haven’ currency, which means that the value of the currency is relatively stable against a basket of other currencies. This further entrenches the CHF’s role as a store of liquid wealth for those inside and outside of Switzerland
Why is the Swiss Franc a safe haven currency?
Curiously, the value of the Swiss Franc is not underpinned by interest rates. In fact, the Swiss Average Rate Over-Night (SARON) is negative -0.75% at the time of writing. This means that savers pay money on deposits rather than receiving interest.
- Regulatory environment - the Swiss financial system has proven itself to be robust and its financial regulator has sufficient teeth to maintain trust in the integrity of firms operating legally in the banking sector.
- Prudent banking principles - Zurich banks engage in less speculative activity compared to their London and New York counterparts. During the 2008 - 2009 financial crisis, the US and UK governments stepped in to bail out bankrupt banks whereas similar drastic measures simply were not needed in Switzerland.
- Historical data shows that Swiss Francs act like a hedge. During the turmoil in the financial markets, capital tends to leave risky asset classes (such as equities and corporate bonds) and move to safety (such as government bonds and cash). The Swiss Franc is known to be a buoyant asset during such times because the demand for the currency swells. This has formed a self-fulfilling prophecy that sees CHF appreciate against other reserve currencies during stock market crashes.
Curiously, the value of the Swiss Franc is not underpinned by interest rates. In fact, the Swiss Average Rate Over-Night (SARON) is negative -0.75% at the time of writing. This means that savers pay money on deposits rather than receiving interest.