When trading on the Forex market we base our positions of course on the movements we anticipate in the rates and the difference between the currencies of a currency pair. But it can also be advantageous to use the interest rates of each of these currencies to carry out more conclusive analyses.
We will therefore explain to you here how to profit from the rates of the USD/CHF currency pair through detailing how to analyse them and how they are fixed by the relevant authorities.
General presentation of the USD/CHF currency pair:
The USD/CHF represents the exchange rate between the American Dollar and the Swiss Franc. It is therefore the exchange rate of the American dollar expressed in Swiss Francs.
The USD/CHF currency pair accounts for nearly 4% of all annual transactions on the Forex market, this means it is the fifth most traded currency pair worldwide.
Its historic volatility is fairly significant with 130 pips maximum difference since its initial quotation. It is quoted to four decimal places, even five at times depending on the broker and its exchange rate is floating therefore dependant on supply and demand.
The USD/CHF currency pair is what is called a trend pair which means that its movements, rising or falling, tend to be both strong and long.It is therefore ideal for using the swing trading strategy.
Another significant point is that as the Swiss Franc is considered a refuge value this greatly influences the rate of this currency pair in times of recession on the financial markets.
Introduction and rate of the USD/CHF currency pair:
One of the particularities of the USD/CHF currency pair is undoubtedly its strong dependence on the economical situation. Generally we can observe a drop in this pair when growth is significant and a rise in this pair during times of crisis. This phenomenon can be explained by the fact that the Swiss Franc tend to play its role as a safe value when other currencies lose points. This observation has been confirmed throughout its history and can be explained by the importance of the Swiss Franc on an international level. We can for example note a strong increase in this currency during the last great economic crises.
The Swiss economy is one of the most flourishing at present and this country seems to have amazingly escaped the world economic crisis which is no doubt due to the large gold reserves that are held by the Swiss banking system. The Swiss Franc therefore tends to reassure traders. But the fact that Switzerland is considered as a fiscal paradise also tends to reassure investors regarding the long term value of this currency.Certain economists even argue that Switzerland is, according to their studies, the only country in the world that truly merits its triple A status.
The analysis of this currency pair is however generally the domain of more experienced traders, but may allow them to develop complex strategies due to the strength of its movements both rising and falling.
As you undoubtedly already know, there are a number of correlations between exchange rate movements of the different currencies on the Forex market. Here we offer you the opportunity to learn the positive and negative correlations between the USD/CHF and other currency pairs.
Concerning the positive correlations, or the currency pairs that tend to move in the same direction as the USD/CHF, we notably find the GBP/USD currency pair, the AUD/USD and the EUR/USD. This is due to the fact that the American dollar is the counter currency here and therefore the changes that affect the American dollar are felt by all these currency pairs.
In the same way we find negative correlations between the USD/CHF currency pair and other pairs, this means that this currency pair changes in a general manner in the opposite direction of that of the USD/JPY currency pair or the USD/CAD. In fact, here, the American dollar is the base currency. We also note a strong negative correlation between the USD/CHF and the EUR/USD. It is therefore advisable to take a buying position on the USD/CHF when the EUR/USD rate has dropped and vice versa. Finally, a last negative correlation should be noted here with the GBP/USD due to the positive correlation between the Swiss Franc, the Euro and the Sterling Pound.
Using positive or negative correlations between the different currency pairs is particularly advantageous when you use a day trading strategy as it enables you to anticipate rapid movements over the short term.
We conclude this article with a detailed historical summary of the USD/CHF currency pair.
This currency pair came into being in 1850 which was the year that the Swiss Franc was launched onto the market. Since this time the USD/CHF has become the sixth most traded currency pair worldwide whereas at the beginning it was more used to ensure the stability of trade between Switzerland and the United States. Nowadays investments from the USA in Switzerland represent nearly 130 billion dollars which means that the United States is the primary investment partner in Switzerland which has of course greatly contributed to an increase in the popularity of this currency pair.
Switzerland is in fact the second major trading partner of the United States, just behind Germany.
However it was the Great Depression that made the Swiss Franc the refuge asset as we know it today. In fact, at that time the Swiss currency rose against all the other currencies apart from the Yen to such a point that the BNS had to intervene on the exchange market to stop its rise by reducing the rate of this currency by half against the Euro but this procedure finally stopped in 2014 with a rebound of the Swiss Franc of nearly 25% in just a few minutes.
As this historical information about the USD/CHF shows us, the decisions and interventions of the BNS play a preponderant role as to how traders behave towards this currency pair. It is therefore important to follow this indicator.
The interest rates of the currencies are independently fixed by competent authorities and entities depending directly on the country or group of countries concerned. Concerning the USD/CHF the interest rate of the American dollar is fixed by the American Federal Reserve or the Fed. For the interest rate of the Swiss Franc it is the BNS, or Swiss National Bank that is responsible for this operation.
Of course, these interest rates are not fixed and are in fact regularly reviewed and modified either up or down. The economic calendar takes these changes into account.
When one of the authorities cited above decides to review the interest rate of its currency this often leads to a change in the rate of the currency pair concerned. In fact, the higher the interest rate, the more beneficial it can be to sell a currency, and vice versa.
What are the advantages of the USD/CHF currency pair as an asset?
We now offer you the opportunity to learn about the real advantages of the USD/CHF currency pair as a trading asset.In fact, this currency pair is definitely worth your attention as it offers numerous advantages.
Firstly and despite the fact that it is a little less volatile than other currency pairs and notably less liquid than the Euro or Sterling Pound, the USD/CHF is fairly frequently traded due to this liquidity. In fact, this currency pair is highly influenced by certain data such as political or economic instability notably during an international crisis as investors particularly appreciate a refuge asset such as the Swiss Franc at such times.
You can also use information on the sterling pound to trade in the USD/CHF currency pair as the similarities concerning rates and technical characteristics are numerous here. You can therefore use this British currency to analyse the USD/CHF rate.
The supports that you can use to invest in this currency pair are also numerous. Amongst these there is the Forex online of course as well as ETFs, futures contracts and options.
Another advantage of this currency pair concerns the fact that the information flow about these two currencies is just about continuous. This means that the economic information from Switzerland and the United States is abundant and it is therefore fairly easy to complete a comprehensive fundamental analysis of this asset.
What are the disadvantages of the USD/CHF currency pair and the risks that you should take into account?
Now that you know the different advantages of the USD/CHF currency pair we offer you the opportunity to learn about its few disadvantages and risks that you should also take into consideration before launching into speculating on this asset.
Firstly, the fact that the Swiss Franc is considered as a refuge asset can be as much a disadvantage as an advantage. In fact, the American dollar is also considered as a safe currency notably in times of crisis. It can therefore be difficult during these times of incertitude to know which currency the investors will turn to and therefore how each currency pair will react.
We are also wary of risks linked to the leverage effect on this currency pair. In fact, if we look at the strong volatility of the USD/CHF currency pair using such a leverage effect can be risky if you do not have sufficient capital to respond to a required margin call.
In any case, without the leverage effect, this volatility remains relatively below what is offered by the majority of other currency pairs with lesser peaks and lows and therefore the possibility of lower profits over the short or medium term.