CAN TRADERS DEPEND ON THE SWISS FRANC?

A safe haven investment can withstand any market turbulence. That is why in times of market downturns, investors look after these instruments to limit their losses. For instance, during the 2008 financial crisis, traders raised the value of gold, as well as the US Treasury bills in which its value became negative at some points. As a result, they were willing to give up yield and pay the government for their principal to be safe in a US government-backed investment.

For foreign exchange traders, Swiss franc is considered one of the safe haven investments due to the stability of the Swiss government and financial system, as well as low inflation rate and confidence in the Swiss National Bank.

The currency appreciated during the 2008 financial crisis, as several investors discarded unsafe assets and placed their money in it. Also, during the 2011 European debt crisis, the franc advanced significantly versus the euro.

And so the SNB set an exchange rate of 1.20 Swiss francs to a euro following the former made waves in the industry as a well-known safe haven. The central bank wanted to support the euro, hoping it would help bring down its currency’s value and retain price edge in the export market. In order to back the common currency, the SNB had to purchase euro using Swiss francs it printed.

But the Swiss franc remained stable after the central bank’s decision. Based on a survey by Deutsche Bundesbank, Germany’s central bank, between March 1986 and September 2012, the franc tended to escalate during times when a global stock market index declined because of financial stress. But in times of low financial stress, the franc’s value depended on more fundamental factors including inflation.

Having said that, Swiss people have begun to notice the SNB was igniting hyperinflation or a period of very high inflation by generating more money to purchase euros. And because of the Swiss central bank’s move, prices were plunging in the economy.

On 15 January 2015, the Swiss National Bank abandoned its euro cap. Following the central bank ditched the currency cap, the euro has plummeted versus the Swiss franc. The decision emerged after the European Central Bank’s quantitative easing program on March 15, where ECB President Mario Draghi revealed their €1 trillion program to be used for purchasing €60 billion of bonds a month until September or inflation is back on track towards the central bank’s below 2% target.

Can traders depend on the Swiss franc? Definitely. Thanks to the currency’s economy, which is also considered a safe haven and ranked as one of the safest worldwide. Switzerland also depends on foreign investments. Being a neutral nation, the country is not part of the European Union, making its safe haven appeal more apparent. Unless there are certain fundamental changes in its system, the Swiss franc will retain its allure as a safe haven currency.