Spread Betting: Trading USD/CHF
In contrast to many other currency pairings, the US dollar versus the Swiss franc has many influencing factors that you do not have to consider otherwise. The Swiss are rightly respected for the tight control they keep on the economy, and this is reflected directly in the Swiss franc and its value.
Firstly, one question that everyone asks is “Why is CHF the abbreviation for the Swiss franc?”. The answer is that it is short for Confoederatio Helvetica franc. Incidentally, Liechtenstein also uses the Swiss franc. Because of its location, the Swiss regularly use several European languages, and the country is considered quadra-lingual. It is landlocked, and relies upon imports and exports for its economy. Germany is the main trading partner, taking 20% of the exports and providing 30% of the imports, and the European Union in general is the main market.
The Swiss take any measure possible to maintain a low unemployment rate, and the rate of inflation is typically less than one percent. The balance of trade is something to be envied by most countries, and the consequence of all this stability is that the country is regarded as a safe haven economically. This is aided by the fact that the Swiss bank keeps substantial gold reserves, which tend to mean an increase in the value of the Swiss franc when gold prices rise. Typically, a Swiss bank account meant that the holder had wealth and sought a measure of anonymity. This vision was disrupted in recent years, when the UBS gave in to demands from the US for information. Still, the Swiss are noted for extraordinarily tight control on the economy.
While the Swiss are dependent on imports, they manage to produce 60% of their food internally. High import tariffs and subsidies make this a realistic prospect. On the energy front, the majority of electric power comes from hydroelectricity, and nuclear plants account for about 40% of total demand, meaning that fossil fuels are not particularly significant in this regard.
What all this means is that the USD/CHF tends to follow the fortunes of the US dollar much more than the Swiss franc. The franc is much more stable comparatively, and as commodities are usually priced in US dollars, when commodity prices rise in dollar value, the US dollar falls, relatively. In fact, the US dollar has fallen for the last 10 years in comparison to the Swiss franc, an indication of the devaluation of the US currency being caused by the propensity for printing more of it. It is also worth noting that in general the USD/CHF is inversely correlated to the EUR/USD meaning that if the EUR/USD is strenghtening, the USD/CHF is likely to be weakening. In fact if you were to put an EUR/USD and USD/CHF chart of similar timeframes and put one right side up and the other upside down, you will find that they look very much the same due to the negative correlation. Because of this some experienced traders will follow the the euro/dollar (EUR/USD) to trade the dollar/Swiss franc (USD/CHF).
But let’s go back to the USA economy and Switzerland. With both countries, the value of the currency depends on various economic indicators, such as the measure of unemployment, which as already stated is carefully controlled in Switzerland but has run wild in the US; the balance of trade (ditto); inflation and production. Whenever there are announcements on any of these topics, you can expect to see an impact on the currency pairing. The easiest way to think of the USD/CHF is in terms of the Swiss franc remaining at a constant value, and then analyzing the US economy to see which way the dollar will tend.
The EUR/CHF Peg Abandonment
Switzerland’s central bank sent shockwaves thru global markets with a surprise dramatic radical policy shift on the 15th January 2015 that scrapped a three-year-old cap on the Swiss franc which has kept its rate fixed at around 1.20 to the euro since September 2011. Originally this monetary policy was adopted in September 2011 to shield the Swiss economy from the European debt crisis when global markets were in turmoil. Investors have traditionally considered the Swiss franc as a ‘safe haven’ asset so during the financial crisis they kept buying the franc causing it to rise dramatically. But an expensive franc hurts the country so the SNB created new francs and utilised them to buy euros. Boosting the supply of Swiss francs in relatioin to euros on currency markets caused the franc’s value to stop appreciating (thereby making sure that an euro was kept at a level equal to 1.2 francs). This policy means that by 2014 Switzerland’s central bank had reserves worth $480 billion-worth of foreign currency, an amount equivalent to around 70% of Swiss GDP. It quickly became apparent that the fixed cap would have been impossible to retain once the European Central Bank (ECB) initiated its money printing programme to jumpstart the Eurozone economy. A substantial quantitative easing program by the ECB would depreciate the euro and make a defense of the Swiss franc peg too difficult. The Swiss franc spiked by up to 30% in a matter of minutes at one moment, before settling later at about parity to the euro (still up by some 20%) while it also climbed by 15% against more than 150 other currencies tracked by Bloomberg.
The Swiss National Bank believed that by removing the cap and bringing in a negative interest rate policy, the currency would weaken but it had the opposite effect. In the realms of central banks, slow and predictable decisions are the norm. So when on on January 15th 2015 (Thursday), the SNB suddenly announced that it would stop its peg at a fixed exchange rate with the euro, there wsa market panic and the franc spiked up sharply. The day preceding the announcement one euro was worth 1.2 Swiss francs, on Thurday its value had collapsed to just 0.85 francs. Some global funds and forex brokers suffered heavy losses while the Swiss stock market plunged. Why did the Swiss National Bank provoke such chaos?
A higher Swiss franc increases prices of Swiss exports and as such lowers returns on firms’ profits earned in other currencies, particularly the euro, as a lot of Swiss exports are consumed in the eurozone. As the Swiss franc rallied sharply Swiss stocks like offshore drilling contractor Transocean, Lindt (which makes chocolates) and Rolex (luxury brand for watches) took a tumbling due to fears that higher prices would negatively impact demand for local products. Swiss banks’ stock prices like Julius Baer and UBS were also hit while the wider swiss stock market also suffered. In practice people who earn money in CHF received a 20% boost in their purchasing power against Eurozone countries which is particularly good for foreigners who are employed in Switzerland but live in a Eurozone country. On the other hand, people who had borrowed monies in CHF will find that their remaining debt has just increased by 20%. People who had savings in CHF will also find that they now have 20% more. We will have to see what will happen in the coming months however it is clear that the Swiss National Bank (SNB) didn’t want to keep their peg and was probably concerned about likely quantitative easing in Europe, which may lead to an even weaker Euro. The decline in the euro in the last few months against the dollar has means that due to the peg the franc has fallen too.
Spread Betting the USD/CHF
Traders are attracted by the possibility of controlling large currency positions with little money down and this is where day trading comes useful. Currencies as a rule don’t move so much but couple that with leverage and spread betting and trading foreign exchange becomes an attractive proposition.
Whenever you are spread betting on the USD/CHF, the majority of the time that you are betting on how the dollar will be impacted by the various economic factors of the economy. The Swiss franc tends to be solid and stable, in keeping with its reputation, while other currencies including the US dollar will spring up and down.
The current price for a daily rolling bet on this currency pair is 9262.9 – 9264.8 with Ayondo. If you think that the American economy is picking up, and that the dollar will rise in relation to the Swiss franc, you might want to place a long bet for £12 per point. The bet would go on at 9264.8, the buying price.
Let’s assume that the rate does go up, and you close your bet when the quote is 9423.1 – 9425.0. While you hold the bet, there is the chance that you are charged a little interest each night when it is rolled over, but if you do not hold the bet more than a week or two this should not be significant. Here is how you work out how much you have won: –
- Your long bet was placed at 9264.8
- The bet closed at 9423.1
- Therefore you have gained 9423.1 less 9264.8 points
- A total of 158.3 points
- Your wager was for £12 per point
- So you have won a total of £1899.60
As the markets can go down as well as up, you should be prepared to calculate how much you have lost if your bet is not a winner. Say the price went down to 9221.4 – 9223.3, and you closed your bet to limit your losses. Working out what you lost: –
- Your long bet was placed at 9264.8
- The bet closed at 9221.4
- Therefore you have lost 9264.8 less 9221.4 points
- A total of 43.4 points
- Your wager was for £12 per point
- So you have lost a total of £520.80
Considering now the opposite case, where you think the US dollar will go down in relation to the franc, you may want to take a short position, betting £5 per point at the price of 9262.9 (a short position opens at the selling price). You may be right, and if the price quote drops to 9133.6 – 9135.5, you could close your bet and take your winnings.
- The bet opened at 9262.9
- The bet closed at 9135.5
- Therefore you have gained 9262.9-9135.5 points
- This is a total of 127.4 points
- Your stake was £5 per point
- So you have won 127.4 times £5
- Your total winnings are £637
Once again, you would be foolish not to consider what could happen if you were wrong. Perhaps the price rose after you placed your short bet, and you decided to close your losing position when it reached 9302.6 – 9304.5.
- The bet opened at 9262.9
- The bet closed at 9304.5
- Therefore you have lost 9304.5-9262.9 points
- This is a total of 41.6 points
- Your stake was £5 per point
- So you have lost 41.6 times £5
- Your total losses are £208
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