The euro and the Swiss franc currencies have a special relationship which every forex trader should be aware of. The EUR/USD (euro/U.S. dollar) and the USD/CHF (U.S. dollar/Swiss franc) have historically had around a 95% negative correlation. This means the USD/CHF generally goes down when the EUR/USD rallies and vice versa.
U.S. Dollar Impact on Currency Correlations
The fact that there is significant correlation between the two currency pairs is not that surprising, since most currencies when traded against the U.S. dollar generally have more than 50% correlation due to the U.S. dollar being a dominant currency in the forex market. About 90% of currency transactions will involve the U.S. dollar. Additionally, the American economy is the largest economy in the world, therefore the health of the U.S. economy will have a significant effect on the health of numerous other countries.
Eurozone and Switzerland Connections
However, the reason that the EUR/USD and the USD/CHF have such a stronger correlation than other currency pairs involving the U.S. dollar is due to the close connections between Switzerland and the eurozone. Switzerland is located right in the middle of the eurozone, despite not being a part of the eurozone. The close proximity as well as strong trade ties have created an extremely strong correlation between the euro and the Swiss franc.
Forex trader should keep these correlations in mind when making trading decisions. Many traders will use strong correlations such as this one in order to confirm significant market trends. However, traders should also be aware of the increased risk when simultaneously trading two currency pairs that are highly correlated. Therefore, proper risk management strategies should be in place.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.