The Swiss franc (CHF) is famous for its safe nature. This combined with the secrecy of the banking system leads to the formation of Switzerland’s image as the safe haven for capital investments. The movements in the value of the Swiss franc are typically attributed to different external events.
This is generally caused by the neutral policy that the Swiss government follows. When the world economy is characterized by instability, then investors tend to concentrate their efforts in keeping the value of their capital rather than attempting to increase it.
Under such conditions, the value of the Swiss franc tends to increase, which is caused by the flow of capital to Switzerland.
Another trait of the Swiss franc is its relation to the gold. This is caused by the Swiss constitution itself, which requires 40% backing of the currency with gold reserves.
As a result Switzerland is fourth in the world of holdings of gold. This leads to the close correlation of the Swiss franc to gold. This means that if the value of gold increases so will the value of the Swiss franc.
The tendency of traders toward the search of assets with the highest yield has resulted to the wide popularity of the carry trade technique.
The high selling or borrowing of the CHF has resulted from its low interest rate. Thus, a high yield currency is needed against the CHF in order to complete the carry trade. The GBP/CHF and AUD/CHF represent the currency pairs, which are commonly used in carry trades.
In the focus of attention of forex traders fall the interest rate differentials between Euro Swiss futures and foreign interest rate futures.
Specifically, the interest rate differentials between the Eurodollar and the three-month Euro Swiss are of extreme importance to traders, since they show the amount of premium yield that is offered by US fixed income assets over Swiss fixed income assets.
The reverse is also true. Potential currency movements can be also recognized by this differential, which is caused by the search for high yield assets.
The Swiss banking system is famous with the high confidentiality of clients’ account status. However, an increased pressure by the EU has been exercised in order to decrease it and provide for more transparency.
This EU pressure has been caused by the need of the EU to prosecute the tax evaders that take advantage of the confidentiality of the Swiss bank system.
However, Switzerland is reluctant to take such measures since it will spoil its unique selling point by which clients are attracted. Even the threat posed by the EU in the form of severe sanctions has not decreased Switzerland’s reluctance.
Negotiations are being conducted in order to find an agreeable to the both parties involved solution. The value of the CHF will be greatly influenced when news on a potential change in the banking system is released.