intro – usd chf:
USD CHF is one of the most liquid currency pair by traded volume in the world. USD and CHF are two of the world’s strongest reserve currencies. Swiss Franc(CHF) holds the pole position as a safe haven currency. This is due to Switzerland’s history of neutrality and it’s significance in the international banking sector. In addition to Switzerland, CHF is also the currency of Principality of Liechtenstein and Italian exclave of Campione d’Italia.
The US Dollar(USD) is the most liquid traded currency in the world and regarded as a safe haven to park cash in times of uncertainty. Thereby making the USD CHF rate less volatile than other currency pairs. The USD CHF rate is notably influenced by the monetary policies of the US Federal Reserve and the Swiss National Bank (SNB). In addition, global macro-economic and political factors play a role in USD CHF rate movement.
US and Switzerland are both globally significant advanced free market economies. This makes the economic data produced by them reliable input for predicting USD CHF future rates. In this article, we will take a look at how Swiss Franc came into existence. We will then look at the most important variables and factors that influence USD CHF. Throughout the article, we will also look at the cross currency correlation influence on USD CHF movement.
a detour back in time
Before 1798, there were 860 different types of currencies in circulation in Switzerland. There were around 75 different entities that minted coins. There were different values, denominations and monetary systems. For instance – thalers from Basel, Bern, Geneva and Zurich or the florin of Fribourg, among others.
In 1798 the Helvetic Republic introduced a new monetary system based on the thalers from Berna. It was divided into 10 batzen or 100 rappen. The Swiss Franc equaled to 6 grams and three quarters of pure silver. This franc was issued until the end of the Helvetic Republic in 1803. Subsequently, some private banks started to issue the first banknotes. People were also using a lot of foreign currency(money that mercenaries brought back home) at this time. As a result, Switzerland ended up with around 8,000 different coins and banknotes circulating at the same time.
In 1848, new Federal Constitution stated that Federal Government would be the only entity authorised to issue money in the country. Two years later, the Swiss Franc was introduced as monetary unit in Switzerland. The Swiss Franc entered into circulation at the same time as the French Franc. However, France adopted Euro in 2002 after joining the Eurozone economic and monetary union. Following this, USD CHF became a major traded currency pair in the world.
USD CHF dynamic in modern times
Swiss Franc(CHF) has been a victim of it’s own success, especially in the 21st century. Due to high demand for Swiss Franc as a safe haven during periods of global economic uncertainty, USD CHF and EUR CHF rates drop as CHF strengthens. Hence, after the 08-09 global economic crisis, Switzerland became a very expensive place to do business. To overcome this, the Swiss National Bank pegged its Swiss franc to the euro on 6-Sep-2011. However, they abandoned this(peg of 1.20 to the Euro) on 15-Jan-2015.
USD CHF is generally negatively correlated with the EUR USD and GBP USD, because of positive correlation of the Euro, Swiss Franc and the British pound. Investors also view Japanese Yen(JPY) to be positively correlated with Swiss Franc(CHF) during times of recession in developed western economies. We have discussed the reasons for Swiss Franc as safe haven earlier.
Japanese Yen is also a safe haven currency in times of economic stress because of positive net foreign asset position. This means in times of crisis, Japan sells foreign assets. Then repatriate their capital from abroad. This process of converting that capital back into JPY raises its price. Also, JPY has zero to negative interest rates, making it common and safer to borrow in.
variables and factors that impact USD CHF market
Firstly, the trade volume between Switzerland and US dictates the demand for CHF or USD respectively. For instance, if Americans suddenly start buying a lot of Swiss watches, this will cause a spike in demand for CHF, since the Swiss watch makers will have to be paid in Swiss Francs. On the other hand, if Swiss watch makers suddenly start investing in YouTube video ads to increase their watch sales, then this will lead to a spike in demand for USD, since Google(YouTube’s parent company) would want to be paid in USD.
Secondly, domestic inflation in Switzerland and US also impacts the USD CHF rate. Higher inflation depreciates the value of the currency. For instance a higher inflation rate in Switzerland, means that generally a watch part ‘X’ that was CHF 10, now costs lets say, CHF 11. As a result, Swiss watches could now become more expensive for American consumers, leading to a potential fall in demand for Swiss watches.
As a result, Swiss watch makers, will keep the prices consistent in USD. Hence, the markets will see a depreciation in the value of CHF vs USD. The Swiss watch makers will earn more CHF per USD. However, their CHF will be worth less now due to positive inflation. This is assuming 0 inflation rate change in US and all other factors being static.
Thirdly, short and medium term interest rates will impact the USD CHF market as higher rates in any currency will increase the demand for that currency. As a result, the domestic currency’s value will appreciate. For instance, if the rates in US go up, the Swiss watch maker who got paid in USD might park the USD cash reserve. He may use an interest paying account or buy US Govt. bonds, instead of exchanging it into CHF. This will cause USD CHF rate to rise.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact the value of USD CHF. Unemployment rate(in addition to per Capita GDP) is a measure of how much disposable income the consumers have, that they can spend on foreign goods .
For instance, lower unemployment and higher per Capita GDP in US will increase demand for all watches(including Swiss watches), and so, a higher demand for CHF. This will cause USD CHF rate to drop. Meanwhile, a higher PMI in US will mean an increase in economic activity in US leading to higher employment and a high demand for USD to pay those employees. This will cause USD CHF rate to rise.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily USD CHF prediction using algorithms based on all factors that impact the price of USD CHF. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.