Why The Swiss Franc is a Stable Currency

The Swiss franc is the country's official currency. The currency is denoted by the sign Fr and is abbreviated as CHF. The Swiss National Bank (SNB), the country's central bank, has sole responsibility over the printing of banknotes and the minting of coins. The franc is split into 100 centimes.


After 2000, the Swiss franc gained significantly in value against both the US dollar and the euro, which is used in the European Union. Factors such as the European debt crisis and the United States' accommodating monetary policy The Federal Reserve helped strengthen the franc's value.


Currencies are traded in pairs; thus, they are either strong or weak compared to other currencies. The European debt crisis prompted investors to seek a safe haven in the Swiss franc, while the US dollar's appeal was weakened by lax monetary policy.


Understanding Why the Swiss Franc is So Strong


The rapid rise of the Swiss franc in 2015 was primarily the result of a single significant event early in the year. The Swiss National Bank suddenly withdrew the peg of 1.20 francs per euro on January 15. The central bank stated that this was required since the peg was no longer viable. In the immediate aftermath of the revelation, the currency surged 30 per cent against the euro and 25 per cent against the US dollar. The decision shook the markets to their core, putting several foreign currency dealers out of business.


Here are a few other reasons why this currency is so strong.


- Switzerland has a long history of low debt and fiscal responsibility. The nation has hard assets such as gold reserves, and the Swiss franc has long been the currency of choice for investors looking for security.


- Switzerland is not part of the European Union (EU) and the euro debt crisis. The euro has been weakened by the recent debt crisis, as has the US dollar.


- Switzerland has been in a long-term deflationary cycle for some time. Many analysts believe that the Swiss franc will continue to rise as a result.


Why Switzerland Doesn't Use Euros


Switzerland is not a member of the EU. Instead, it has a series of agreements with the EU known as the Bilateral Agreements, which allow the country to participate in the EU's single market without membership in the EU economic and monetary union.


The agreement allows for the free flow of labour, capital, goods and services between Switzerland and the European Union. The EU has no direct jurisdiction over Switzerland in any policy area. Still, the European Court of Justice has jurisdiction in disputes between companies in the EU and Switzerland and between individuals in the EU and Switzerland.


Switzerland is outside the EU customs union, meaning that it has its own customs policy, which joins together with the EU's customs union, known as the Common Customs Code. This allows Switzerland to negotiate its own trade agreements, which it has done in the form of bilateral trade agreements. Outside the customs union, Switzerland is free to set its own tariffs much lower than the EU's common external tariff.


The Swiss franc is the only currency used in Switzerland. The Swiss franc serves as a national currency and as the de facto currency of Liechtenstein, a fellow member of the European Free Trade Association (EFTA).


What Makes the Swiss Franc a Safe Investment?


The Swiss franc is the strongest currency in the world. Some of the reasons the Swiss franc is considered a safe investment are:


- Its long-term value is tied to the long-term strength and stability of the Swiss economy. This is one of the most important economies in the world.


- The country has a long history of hard assets, including gold reserves. Investors know that the Swiss franc is tied to hard assets.


- The Swiss debt market's small size contributes to its economic benefit. A big economy, such as Russia or Germany, might essentially seize control of Swiss debt if it invested its vast reserves in Swiss debt. Such buy-ins are difficult because of the tiny market size and Switzerland's lack of a necessity for foreign money due to the country's lack of a deficit. This protects the Swiss economy and helps to keep the Swiss franc steady in value.


- Other considerations include the Swiss franc's strong GDP, lack of a budget deficit, low unemployment, sizeable economic contribution from the financial services sector, high per capita income, and status as a destination for cash through hidden bank accounts.


Is Now a Good Time to Buy Swiss Francs?


If the US dollar and the euro continue to falter and the Chinese currency continues to gain value, it is possible that Swiss francs could continue to rise. If you want to buy Swiss francs, you may want to make your purchase now while they are less expensive. This way, you won't need to worry about paying more later on if the currency continues to rise.


How to Invest in the Swiss Currency


1. Investing in ETFs


Those interested in investing in Swiss francs can do so simply through exchange-traded funds (ETFs) that trade on U.S. stock markets. The Invesco CurrencyShares Swiss Franc Trust is the most popular ETF for Swiss francs (FXF).


There are a few advantages to using an ETF instead of purchasing Swiss francs on the spot currency market. These are some examples:


  • ETFs are simple to buy and may be purchased using standard trading accounts. Shares are traded on the NYSE daily.

  • Margin accounts are available for ETFs. This implies that you can leverage your holdings, but only to a lesser extent than in the currency spot market.

  • ETFs are traded as securities; therefore, they are less expensive. This means that the expenses are substantially lower than those associated with currency spot market transactions.

2. Opening an Account With a Forex Broker


One of the best ways to buy the Swiss franc is to open an account with a foreign exchange broker. This broker will help you buy Swiss francs using the currency of your choice, such as the US dollar. You can also buy Swiss francs with other currencies such as the euro, the yen or the British pound.


The foreign exchange market is very liquid, meaning that it is easy to buy and sell. You can open an account as either a retail investor or as a professional investor.


- Professional Accounts: Professional accounts are available to experienced currency traders. To open a professional account, you will be asked to prove your experience and show that you have the financial assets needed to meet the bank's minimum requirements.


- Retail Accounts: Retail accounts are available to traders who are new to the market. There are no minimum account requirements for retail customers and no minimum deposit.


The main drawback of this method is that you will be trading against the Swiss National Bank, an excellent trader. This is referred to as trading against the central bank. The central bank is generally a better trader, so you will be at a disadvantage.


3. Buying Swiss Francs on the Spot Market


Another way to buy Swiss francs is to purchase them on the spot market, also known as the interbank market. The currency is traded in 100 cent increments, which means that the minimum transaction amount is 1,000 Swiss francs.


Spot markets are sometimes known as "liquid markets" or "cash markets" since transactions are completed promptly and essentially for the product. While it may take time for cash to be legally transferred between the buyer and seller, such as T+2 on the stock market and in most currency transactions, all parties agree to trade "right now."


4. Futures and Options


Futures and options are another opportunity to invest in the Swiss Franc. Many individuals wrongly believe that the ability to trade these derivatives is limited to stocks. The foreign exchange market provides retail traders with derivative products that help them minimise the risks associated with currency rate fluctuations while also profiting from changes in currency rates. Forex futures and options trading are prominent hedging strategies used by banks and financial organisations.


These items are traded on various exchanges across the world, the most popular of which is the Chicago Mercantile Exchange (CME). Swiss franc futures were launched by CME in 1972, followed by Swiss franc options in 1985. Several firms provide a trading platform for Swiss franc futures and options.


5. Binary Options


Binary options are a popular alternative in the forex market due to their simplicity, flexibility, and convenience of use. The euro and US dollar (EUR/USD), the British pound and US dollar (GBP/USD), the euro and British pound (EUR/GBP), USD/CHF, and the US dollar and Japanese yen (USD/JPY) are some of the most popular currency pairings among binary options traders. The simplicity of binary options is a benefit. All you have to do is forecast whether the currency will rise or fall.


The USD/CHF pair is less volatile than other currency pairings, making it difficult to forecast its movement. Keep an eye out for developments that may have an impact on the pair, such as economic news or monetary action by the United States. The Federal Reserve, as well as the Swiss National Bank, have taken action. Other factors that might cause a currency to change are gross domestic product projections for either country, unemployment data, industrial growth figures, and national debt.


Before going on to the more difficult USD/CHF pair, experiment with a few other currency pairings to get fundamental trading expertise. It would be best if you also learned about technical analysis, which will help you anticipate the pair's movement; these estimations must be supported by fundamental analysis.


FAQS


1. Does Switzerland Accept Euros?


In Switzerland, you may use euros. However, because it is considered a foreign currency, your change is given in francs at a rate calculated at the time of the transaction.


2. Is US Currency Accepted in Switzerland?


In Switzerland, US currencies are not accepted. This means that if you want to visit the nation, you must convert your cash for francs before you travel or after you arrive to perform any financial activities.


3. What is the Future of the Swiss Franc?


According to Trading Economics global macro models and analyst forecasts, the Swiss franc is likely to trade at 0.94 by the end of this quarter. In the next 12 months, it is expected to trade at 0.95.


4. What is the Swiss Franc Backed By?


The Swiss franc is not gold-backed. The Swiss National Bank (SNB) can print any quantity of money it wants without needing a reserve. It is essentially a sort of quantitative easing (QE) that allows a central bank to regulate the currency rate unilaterally.


5. Are Swiss Francs a Good Hedge Against Inflation?


The Swiss franc is a strong hedging play because of the country's central bank and a less susceptible economy to current pricing pressures. Given the Swiss National Bank's tight inflation mission, the franc may be allowed to increase as a hedge against imported inflation.


The Bottom Line


Swiss francs are among the best currencies to invest in due to their stability, safety and long-term value. There are many other reasons why you might want to add Swiss francs to your investment portfolio, such as the currency's low inflation rate.


Swiss francs might also be a good investment if you believe the US dollar and the euro will continue to decline. As of late March 2015, the Swiss franc was the third most-traded currency, following the US dollar and the euro. If you are interested in buying Swiss francs, there are several ways you can do so.


These ways include investing in an exchange-traded fund, opening a foreign exchange account, buying Swiss francs on the spot market, and trading futures and options. You can also invest in Swiss francs by trading binary options or trading the currency pair USD/CHF.



Bound is a specialist foreign exchange hedging firm that offers currency protection for businesses.


We help companies that are at risk of losing money to changes in the exchange rate to protect themselves against these losses.


By using the services that Bound provides, UK companies of all sizes are able to conduct business in foreign currencies with complete certainty about the exchange rates that they will receive. Subscribe to our newsletter or watch a demo of our product today!




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