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 had a look on the Swiss economy and discussed the major factors which have historically spurred demand for its currency as safe haven, as well as the Swiss National Banks goals and instruments to fulfilling them. In the current article we will turn our attention toward the Swiss currencys specific characteristics and major economic indicators that influence its market movement.
The most important and unique characteristic of the Swiss franc is its status of safe haven. We said in the previous article that this is due to Switzerlands renowned political stability and neutrality, as well as the robustness of its financial system and the confidentiality of its banking system. This renders the Swiss franc one of the most popular currencies in financial crises risk-aversion environment and is the main source of incoming capital flows. Thus, the francs market movements are primarily based on external events, rather domestic economic changes.
This means that during times of global instability and risk-aversion when investors are mainly focused on capital retention, their demand for the Swiss franc will strengthen it, regardless of whether the domestic economy is expanding or contracting.
This is exactly what happened during the global financial crisis in the recent years. In a response to aggressively protect the economy from the negative effects of the rapidly appreciating franc, the Swiss National Bank made an unprecedented move on September 6th 2011 and set a base value on the EUR/CHF cross.
The SNBs 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 will 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 expressed it was prepared to buy foreign currency in unlimited quantities.
Another peculiarity of the Swiss franc are 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 activities, especially in the financial sector. Banking and finance is the countrys primary industry and mergers and acquisitions are very common, especially as the consolidation process in the global banking industry continues. Due to the sheer size of Switzerlands banking and insurance companies, any mergers or acquisitions from foreign companies will require a large amount of domestic currency to be bought in order to conduct the transaction, and vice versa. Thus, it is important for day trader to keep his eyes open for any news of M&A activity.
Changes in Swiss banking regulations also have the potential to significantly move the franc. The renowned Swiss banking secrecy, the foundation of its banking system, attracts huge capital, which however is not well met by other countries as it abets tax evasion. With the European Union and other interested parties pressuring Switzerland to continuously improve the transparency of its banking system in order to prosecute tax evaders, the franc might be facing declining demand. The EU and Switzerland continue to negotiate a viable resolution to suit both parties and any decisions to relax the confidentiality of the Swiss banking sector will have have a strong effect on the Swiss economy and its currency.
Widely used in carry trades
Another market mover for the Swiss franc are the so-called carry trades due to its low interest rates. We will discuss carry trades as a trading strategy more thoroughly later in our day trading guide and for now it is sufficient to say that these are trades involving buying a currency with a high interest rate, while selling a currency with a low interest rate. Because of the francs very low interest rate, it is one of the most popular currencies used in carry trading against a higher-yielding counterpart.
Major economic indicators
We said previously in the article that the main market movers for the Swiss franc are mainly external factors, tied to its appeal as a safe haven and the consistent incoming capital flows due to the Swiss banking systems renowned confidentiality. There are, however, a certain number of indicators gauging domestic economic activity which also play a considerable role in the francs pricing, given the countrys highly developed industrial and huge services sector.
– GDP – one of the most important indicators for the national currency is the Gross Domestic Product growth, with the annualized reading having 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 is 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 for 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 around 40 days after the reference month (reading for January is released around March 10th). 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 of the overall economic activity based on a qualitative business survey about 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 one.
Apart from the already discussed economic indicators, other data with significant importance for the Swiss franc are the unemployment rate, SVME – Purchasing Managers Index, the ZEW Survey – Expectations, SECO Consumer Climate, Trade Balance and Producer and Import Prices.