In our last lesson we continued our free forex trading course with a look at the British Pound. In today's lesson we are going to look at the fifth most actively traded currency in the world, the Swiss Franc.
Switzerland is one of the richest countries in the world, and while its economic policies and practices largely conform with EU standards, the country's population rejected accession negotiations with the EU in March of 2001. So, at least for the foreseeable future, the Swiss Franc is expected to remain one of the world's most actively traded currencies, with two dominating features that are important to us as forex traders.
Although this status has started to wane somewhat in recent years, the Swiss Franc has historically been considered one of the world's primary safe haven currencies, which means that money flows into the Swiss Franc during times of economic or geopolitical uncertainty. The primary reasons why this is the case are:
1. The country's ability to remain out of Global Conflicts, a reputation it solidified by remaining neutral during both World Wars.
2. Its economic stability and relatively low inflation rates.
3. The fact that up until recently the currency was 40% backed by gold.
4. Its reputation for high quality financial institutions and banking secrecy.
As you can see from this chart, traders who anticipated the Swiss Franc would strengthen as a result of its safe haven status, could have participated in the 1251 pip move lower in USD/CHF, in the 10 days following the September 11th 2001 attacks.
As another example of the Swiss Franc displaying its safe haven tendencies, traders who anticipated that the Swiss Franc would strengthen as a result of the US Invasion of Iraq, could have participated in another 1200+ pip move in the USD/CHF in the 2 months following the invasion.
In 2005 the Swiss government sold the nations vast gold inventory, and as a result the currency is no longer backed by gold. Some argue that because of this the Swiss Franc has lost much of its safe haven status, something that there will surely be more tests of in the years to come.
The second thing that it is important for traders to understand about the Swiss Franc, is its strong correlation with the Euro. As the Swiss Franc is quoted on the opposing side of the Dollar when compared to the Euro, this means that the USD/CHF currency pair has a strong negative correlation with the EUR/USD currency pair, as you can see from this chart:
As you can see here a chart of the two currency pairs shows the strong negative correlation of over 90% between the two currency pairs, resulting from the strong economic ties between Switzerland and the European Union.
The first reason that it is important for traders to understand this strong negative correlation, is so that they can take it into account when considering trades in both currency pairs. As the two currency pairs have such a high negative correlation, there is a very good possibility that a trader's technical analysis will show a buy signal in the EUR/USD, while at the same time showing a sell signal USD/CHF, or vice versa.
If this trader happened to be blind to the negative correlation we have just outlined, he or she may think that they are putting on two completely different trades. As we have just shown however, what this trader would actually be doing is doubling their exposure to the move they were trying to capture. Conversely, if a trader were to trade these pairs in the same direction, then they would effectively be reducing the potency of both trades, as the negative correlation between the two currency pairs will act to offset the gains or losses that result on each trade.
As the Swiss Franc is no where near as liquid as the Euro, on an intraday basis it is important to be aware that this negative correlation can breakdown some what. Lastly, should the Swiss political and/or economic environment (especially monetary policy) start to substantially diverge from that of the Eurozone, you could see a breakdown of this negative correlation on the longer timeframes as well.
As with the other currency pairs we are studying, FXWords.com has a great page outlining the details of all the important economic indicators for the Franc, a link to which you can find below this video. The Global Calendar at Dailyfx.com also gives you the release dates and realtime analysis of those releases, so you can be aware of them and follow the results in real time there as well.
That's our lesson for today, in our next lesson we will begin a series on the commodity currencies, starting with the Canadian Dollar, so we hope to see you in that lesson.
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