Safe haven or panic button: USD/CHF

The Swiss franc has, or we should say had, a reputation for being a safe-haven currency. Apart from Switzerland's historical neutrality and legendary bank secrecy laws, this reputation is largely a relic of the Cold War. At the time, fears of a European ground war between the United States and the Soviet Union meant most European financial centers could be out of business in short order. In terms of a major European currency alternative to U.S. dollars or German deutsche marks, the CHF became the safe-haven currency during times of geopolitical tensions.

There are still plenty of people in the market who continue to refer to the CHF as a safe-haven currency and, indeed, knee-jerk buying of CHF will frequently occur in response to geopolitical crises or terrorism. But those market reactions are increasingly very short-lived, usually only a few minutes or hours now, before pre-existing trends reassert themselves.

Trading fundamentals of USD/CHF

Instead of portraying it as a safe-haven currency pair, I prefer to view USD/CHF as the panic button of forex markets. When unexpected geopolitical news hits the proverbial fan, USD/CHF usually reacts the fastest and the farthest.

In terms of overall market volume, USD/CHF only accounts for 4 percent of global daily trading volume according to the 2004 BIS survey. With such a small share of market turnover, you’d be right in wondering why it‘s considered a major pair in the first place. In terms of liquidity, Swissy is not a major.

Trading USD/CHF by the numbers

USD/CHF is quoted in terms of the number of CHF per USD. At a USD/CHF rate of 1.2545, it costs CHF 1.2545 to buy $1. USD/CHF trades in the overall direction of the U.S. dollar and inversely to the CHF. If the USD/CHF rate moves higher, the USD is strengthening and the CHF is weakening. The USD is the primary currency in the pairing, and the CHF is the secondary currency. That means

·     USD/CHF is traded in amounts denominated in USD. In online currency trading platforms, standard lot sizes are $100,000, and mini lot sizes are  $10,000.

·        The pip value, or minimum price fluctuation, is denominated in CHF.

·        Profit and loss accrues in CHF. For one standard lot position size, each pip is worth CHF 10; for one mini lot position size, each pip is worth CHF 1. To convert those amounts to USD, divide the CHF amount by the USD/CHF rate. Using 1.2500 as the rate, CHF 10 = $8 and CHF 1 = $0.80. The pip value will change over time as the level of the USD/CHF exchange rate fluctuates, with a lower USD/CHF rate giving a higher pip value in USD terms, and vice versa.

·         Margin calculations are typically calculated in USD. So it’s a straight forward calculation using the leverage rate to see how much margin is required to hold a position in USD/JPY. At 100:1 leverage, $1,000 of available margin is needed to open a standard-size position of 100,000 USD/CHF

Keeping the focus on Europe

When looking at economic fundamentals, its worth remembering that Switzerland conducts the vast share (about 80 percent) of its foreign trade with the Eurozone and remaining EU countries. So when it comes to the value of the CHF, the Swiss are most concerned with its level against the EUR as opposed to the USD.

The Swiss National Bank (SNB), the Swiss central bank, tends to get involved  in the forex market only when the Swiss franc is either too strong or too weak against the euro. If the CHF is too weak, it can import inflation (higher CHF prices for the same goods), upsetting the SNB’s carefully laid plans to tame inflation. If the CHF is too strong, it can hurt Swiss exports (more euros needed to buy the same Swiss goods).

The SNB typically prefers to use verbal intervention to influence the value of the CHF, and SNB comments frequently stir up USD/CHF and EUR/CHF trading. Since the introduction of the euro in 1999, EUR/CHF has been confined mostly to a relatively narrow range of 1.5000 to 1.6200, but as of this writing it’s pushing toward 1.65, drawing increased criticism from the SNB.

Important Swiss economic reports

Swiss data tends to get lost in the mix of data reports out of the United States and the Eurozone, with many in the market looking at Switzerland as a de facto Eurozone member. In that sense, market reactions to Swiss data and events primarily show up in EUR/CHF cross rates. The important Swiss data to keep an eye on are

• SNB rate decisions and speeches by directorate members
• KOF Index of Globalization Swiss leading indicator
• Retail sales
• Trade balance
• PPI and CPI
• Unemployment rate