The dollar-CHF, generally written USD/CHF and pronounced the dollar-Swiss, is known as the world’s safe haven currency, specifically due to the nature of Switzerland itself.
- Geopolitical neutrality makes the swissie stable during turmoil.
- Reflects the swings of gold prices.
- Its low interest rate impacts its long-term value against other currencies.
- Use a practice account to learn how it pairs with other currencies.
Switzerland has long been known for its neutrality in geopolitical events, and up until the 1990s was by far the most economically prosperous country in Europe for the majority of the 20th century. The currency was once pegged to the gold standard. If traders had wanted to take advantage of gold prices, they could have also simply traded the dollar-CHF.
Although the correlation between gold and the USD/CHF now is not as strong as it is with the AUD/USD, which is because Australia is the third largest miner of gold in the world, in 2002-2005, the swissie was still 85% correlated to gold prices.
Generally, during most market or geopolitical turmoil, the currency rate for the dollar-CHF will drop while the swissie will have strengthened. One good example is the day of the September 11 terror attacks in 2001. The USD/CHF actually dropped over 500 pips as traders were looking to move their funds into the safer investment of the Swiss currency.
Another important factor to consider when trading the dollar-CHF is interest rates. At about 2.50%, the swissie currently has the second lowest interest rate of any G8 nation. This means that although investors might be keen on moving funds into the CHF during times of turmoil, they will be just as quick to move the funds back into other currencies and markets once the commotion has subsided. The reason is quite simply due to interest-rate differentials in currencies: traders are able to earn or pay interest on their positions based on whether they are buying or selling the currency with the higher yield.
In the case of the dollar-CHF, if traders were to buy the USD, then they would be able to earn interest on that position, but if they buy the swissie, they will have to pay interest everyday that the position is open. The difference between the currency pair yields is 2.75%. For example, if a $100,000 short dollar-CHF position were entered into the market, this would create a loss of $2750 per year solely on interest.
On top of this, the market generally moves in favor of currencies that have the higher yield, so losses due to movement in the currency are also certainly possible. A great way to try trading this currency pair is to use a free forex practice account and place virtual trades to get an understanding of the impacts of the interest rate.
