What Are the Economic Drivers of the Swiss Franc?

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Despite being a relatively smaller country, Switzerland has historically had a large influence on the worldwide financial community. This also includes the country’s currency, the Swiss franc. The currency is the sixth-most commonly traded currency in the forex markets.

Swiss National Bank

The Swiss National Bank (SNB) makes monetary policy decisions for Switzerland. The SNB’s governing board is smaller than most other central banks. The board is made up of three major bank heads and meet every quarter to make monetary policy decisions.

Inflation

The SNB bases much of its monetary policy decisions on inflation. The SNB generally targets to maintain a consistent rate of inflation of approximately 2%. Switzerland’s national bank is known to be conservative in nature and tends to avoid an overly stimulative monetary policy during periods of economic downturns.

Europe

Due to Switzerland’s close proximity to Europe fluctuations in the European economy has a significant effect on the price of the Swiss franc. The strong correlation between Switzerland and Europe is enhanced through strong trade ties. A growing economy in the Eurozone usually helps stimulate growth in Switzerland which is bullish for the Swiss franc.

Banking Sector

The banking sector is one of the most influential industries in Switzerland’s economy and also play s a significant role in bolstering demand for the Swiss currency. Switzerland’s financial services accounts for more than 11% of the country’s GDP. Part of this stems from the Swiss banking industry’s reputation for neutrality and secrecy, making Swiss banks popular among global funds.

Risk Aversion

The Swiss franc is also known as a potential safe-haven currency in times of political or economic uncertainty in the global markets. During these times it is common to see a surge in the value of the currency. However, the franc may not function as a safe-haven in every risk aversion scenario.

Carry Trade

Due to its relatively low rates the Swiss franc may be driven lower as a result of traders utilizing carry trade strategies.

These are just a few of the various factors which may affect the valuation of the Swiss franc. Forex traders will also want to monitor possible political strife within Europe which could unexpectedly change market sentiment despite fundamental economic factors. Also, markets may also respond to certain technical set ups which could prove to be profitable for many speculators.

Sources:

http://www.investopedia.com/walkthrough/forex/intermediate/level5/franc.aspx

http://www.investopedia.com/articles/forex/06/eurchfrelationship.asp?layout=infini&v=1B

http://www.fxstreet.com/education/forex-basics/understanding-eurchf/2014/08/20/

http://www.investopedia.com/articles/forex/11/swiss-franc-primer.asp?layout=infini&v=1B

Writer Bio

LeBach PhamLe 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.

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