Profile of the Swiss franc – characteristics and major economic indicators
You will learn about the following concepts
- Specific characteristics of the Swiss franc
- Major economic indicators
In the previous article, we took a look at the Swiss economy and discussed the major factors that have historically spurred demand for its currency as a safe haven, as well as the Swiss National Bank’s goals and the instruments it uses to fulfil them. In the current article, we will turn our attention to the Swiss currency’s specific characteristics and the major economic indicators that influence its market movements.
The most important and unique characteristic of the Swiss franc is its status as a safe haven. We said in the previous article that this is due to Switzerland’s renowned political stability and neutrality, as well as the robustness of its financial system and the confidentiality of its banking system. This makes the Swiss franc one of the most popular currencies in risk-averse environments during financial crises and is the main driver of incoming capital flows. Thus, the franc’s market movements are driven primarily by external events rather than domestic economic changes.
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This means that during periods of global instability and risk aversion, when investors are mainly focused on capital preservation, increased demand for the Swiss franc will strengthen it, regardless of whether the domestic economy is expanding or contracting.
Base value
This is exactly what happened during the global financial crisis in recent years. In response to aggressive appreciation of the franc and to protect the economy from its negative effects, the Swiss National Bank took an unprecedented step on 6 September 2011 and set a base value for the EUR/CHF cross.
The SNB’s decision was based on the acute threat the overvalued franc posed to the Swiss economy and the risk of a deflationary development. The central bank stated in its press release that it would no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB vowed to enforce this minimum rate with the utmost determination and stated it was prepared to buy foreign currency in unlimited quantities.
Gold correlation
Another peculiarity of the Swiss franc is its close ties to gold. Because gold is deemed the ultimate safe haven, both the precious metal and the Swiss franc (the premier safe haven currency) tend to appreciate in times of economic uncertainty and instability. Moreover, the Swiss constitution used to require the national currency to be backed 40% by gold reserves. Although this requirement has been removed, the link between gold and the franc remains rooted in Swiss investors’ mindset, resulting in a positive correlation close to 0.8.
M&A activity, banking regulations
The Swiss franc tends to fluctuate amid large merger and acquisition activity, especially in the financial sector. Banking and finance are the country’s primary industries, and mergers and acquisitions are very common, particularly as the consolidation process in the global banking industry continues. Due to the sheer size of Switzerland’s banking and insurance companies, any mergers or acquisitions by foreign firms will require a large amount of domestic currency to be bought to conduct the transaction, and vice versa. Thus, it is important for day traders to keep their eyes open for any news of M&A activity.
Changes in Swiss banking regulations also have the potential to move the franc significantly. The renowned Swiss banking secrecy, the foundation of its banking system, attracts huge capital, which, however, is not well received by other countries as it abets tax evasion. With the European Union and other interested parties pressuring Switzerland to continually improve the transparency of its banking system in order to prosecute tax evaders, the franc may face declining demand. The EU and Switzerland continue to negotiate a viable resolution to suit both parties, and any decision to relax the confidentiality of the Swiss banking sector will have a strong effect on the Swiss economy and its currency.
Widely used in carry trades
Another market mover for the Swiss franc is the so-called carry trade, driven by its low interest rates. We will discuss carry trades as a trading strategy more thoroughly later in our day trading guide; for now, it is sufficient to say that these are trades involving the purchase of a currency with a high interest rate while selling one with a low interest rate. Because of the franc’s very low interest rate, it is one of the most popular currencies used in carry trading against a higher-yielding counterpart.
Major economic indicators
As mentioned earlier, the primary market movers for the Swiss franc are external factors, linked to its appeal as a safe haven and to the steady inflow of capital generated by the Swiss banking system’s renowned confidentiality. There are, however, a number of indicators gauging domestic economic activity that also play a considerable role in the franc’s pricing, given the country’s highly developed industrial base and huge services sector.
– GDP – one of the most important indicators for the national currency is Gross Domestic Product growth, with the annualised reading carrying more weight than the quarter-on-quarter one. Figures are released in the last week of the second month after the reference quarter, e.g., data for the first quarter are published in the last week of May. Generally, the quarter-on-quarter reading is an indicator of medium volatility, while the year-on-year figure is of medium-high volatility.
– Consumer Price Index – consumer inflation is another important market mover. The consumer price index is prepared by the Swiss Federal Statistical Office each month and released in the first or second week of the following month, e.g., the CPI for April is published within the first two weeks of May. The index is calculated on the basis of retail prices in Switzerland in accordance with prevalent international practice. It is a key way to measure changes in purchasing trends and inflation. The two readings – monthly and annual – are given varying weight by different analysts, but both are very closely monitored.
– Retail Sales – released by the Swiss Federal Statistical Office monthly, retail sales are a key measure of consumer spending, which accounts for the majority of overall economic activity. The reading is released about 40 days after the reference month (the reading for January is released around 10 March). It is real, not nominal, and is not seasonally adjusted.
– KOF Leading Indicators – released by the KOF Swiss Economic Institute, the KOF Leading Indicator is generally used to measure future trends in overall economic activity based on a qualitative business survey covering developments in the recent past, the current situation, and expectations for the next six months. The index is a composite reading of 12 economic indicators related to consumer confidence, banking confidence, production, new orders and housing. The reading is released in the last week of each month or the first week of the next.
Apart from the economic indicators already discussed, other data of significant importance for the Swiss franc include the unemployment rate, the SVME Purchasing Managers’ Index, the ZEW Survey – Expectations, the SECO Consumer Climate, the trade balance, and producer and import prices.