Overview, Knowing the Swiss Franc, Factors affecting the Swiss economy

Knowing the Swiss Franc

Safe Haven Currency

The Swiss Franc has been found to appreciate considerably during times of global economic depression when Foreign Investments flow in due to the
Safety of investments in Switzerland. Forex participants need to keep this in mind.

Positive Correlation with Gold

As required by the Constitution of Switzerland, Gold to the tune of 40% of Swiss Francs is maintained by the Treasury. Further, during times of global economic depression, Gold appreciates considerably. Both the above reasons have led to a positive correlation between Gold & Swiss Frank by about 80%.

Effect of Carry Trades

With phenomenally low interest rates offered by the Swiss Franc, Foreign investors tend to park their funds in currencies like GBP or EUR whose rate of returns is much higher. This requires selling of their Swiss assets and can cause a fall in its FX rates. Forex participants carefully follow Euroswiss & Eurodollar futures.

International pressure to reduce Confidentiality

The EU has been putting tremendous pressure on Switzerland to share details of accounts of EU's Tax evading citizens in Swiss banks. Any reduction in the confidentiality level will drastically reduce the Foreign Investments into Switzerland, as it will cease to be a 'Safe Haven' currency.

Takeovers & Mergers

With Globalization on the rise, multinationals merging or acquiring Swiss banks and vice versa have increased considerably. Such deals require buying or selling Swiss Francs and its FX value fluctuates in the short term.

Effect of Cross Rates

Swiss Francs (CHF) is mainly traded with the Euro, and the Euro is traded with the US$ to a large extent. The combination of EUR/CHF pair and the EUR/USD pair determine the movements of CHF/USD pair. Any Global phenomenon directly linking the USD/CHF can only make them trade directly regardless of the Euro.

Factors affecting the Swiss economy and the Franc

¢ Consumer Price Index (CPI) as a measure of Inflation: The CPI indicates the prevailing rate of inflation and is calculated based on prices of retail items. A higher value points to inflationary trend and can cause SNB to react, impacting the Franc.
¢ The GDP: The GDP indicates the net Production and Consumption of Goods & services in Switzerland. A rise in the GDP signifies a growing economy and will positively impact the CHF in the Forex markets.
¢ The Current Account Balance: Traditionally, Switzerland has maintained an ever-growing Current account of Foreign Investor's funds. Any change in this trend will be viewed seriously by the FX markets and the CHF will affected. It must be remembered that Swiss economy relies heavily on Foreign Investments for survival & growth
¢ Growth in M3 - a sign of Inflation: The SNB constantly monitors the M3 index to sight any signs of increasing inflation. The M3 covers liquidity due to Currency, Time deposits & all kinds of Savings Accounts. Significant increase in the M3 index indicates growing inflation and will invite countermeasures from the SNB like change in interest rates. This is bound to impact the CHF as it rate of returns are affected.
¢ The Unemployment Rate: A rise in the Unemployment rate does not augur well for the CHF as it indicates decreased economic activity within Switzerland. With the Banking industry absorbing 50% of the population and Banking being the core sector, this might require an introspection on their part. This is bound to affect the Swiss Franc.
¢ The Industrial Production Index: Though the Swiss economy is dominated by the Banking sector, the Manufacturing sector contributes about 20% to its GDP. Hence, a sound industrial health is important for the Swiss economy. The Industrial Production Index indicates the growth in Industrial Output on a quarterly basis. A higher value on this index indicates a higher contribution of the Manufacturing Sector to the GDP and would have a positive impact on the CHF in the Forex markets.
¢ Global Uncertainties: Terrorism, Economic Recession & similar negative developments can increase the global demand for the 'Safe Haven' Swiss Franc.

Overview, Knowing the Swiss Franc, Factors affecting the Swiss economy