USD/CHF slips below 0.8500 as rising Middle East tensions spur refuge flows

The Swiss Franc (CHF) is the official currency of Switzerland. It is among the top ten most traded currencies globally, reaching volumes that far exceed the size of the Swiss economy. Its value is determined by broad market sentiment, the country’s economic health, or actions taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss franc was pegged to the euro (EUR). The color was suddenly removed, leading to a more than 20% increase in the value of the franc, causing turmoil in the markets. Even though the peg is no longer in effect, CHF holdings tend to be highly correlated with those in the euro due to the heavy dependence of the Swiss economy on the neighboring eurozone.

The Swiss Franc (CHF) is considered a safe-haven asset or a currency that investors tend to buy during times of market stress. This is due to Switzerland’s perceived status in the world: a stable economy, a strong export sector, large central bank reserves or a long-standing policy stance of neutrality in global conflicts make the country’s currency a good choice for fleeing investors of risks. Turbulent times are likely to strengthen the value of the CHF against other currencies that are considered riskier to invest in.

The Swiss National Bank (SNB) meets four times a year – once a quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or is expected to be above target in the near future, the bank will try to tame rising prices by raising the policy rate. Higher interest rates are generally positive for the Swiss franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the CHF.

Macroeconomic data released in Switzerland is key to assessing the state of the economy and can have an impact on the valuation of the Swiss franc (CHF). The Swiss economy is generally stable, but any sudden changes in economic growth, inflation, the current account or the central bank’s foreign reserves have the potential to trigger movements in the CHF. Overall, high economic growth, low unemployment and high confidence are good for the CHF. Conversely, if economic data indicates a weakening of momentum, the CHF is likely to depreciate.

As a small and open economy, Switzerland is heavily dependent on the health of its neighboring eurozone economies. The wider European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the euro area is essential for Switzerland and thus for the Swiss franc (CHF). With such dependence, some models suggest that the correlation between euro (EUR) and CHF assets is greater than 90%, or almost perfect.