The Swiss franc (CHF) has long been considered one of the safe havens of the financial world. In times of trouble, investors could park their money in Switzerland’s national currency and know it would retain its value. The financial crisis of 2007–2008 sent nervous investors flocking to buy Swiss francs.
Its steady performance during the European debt crisis made the franc even more popular. In this article, we will explore financial instruments, like ETFs and forex options, that allow investors to bet on the Swiss franc without actually buying up the currency.
- The Swiss franc (CHF) is the national currency of Switzerland, which does not use the common euro currency as its neighbors do.
- The Swiss franc is considered a safe-haven currency, given the stability of the Swiss government and its financial system. As a result, many investors and traders seek out the Swiss franc.
- Investors have many ways to access the CHF, including via forex markets, ETFs, and derivatives products.
When a Currency Is Too Strong
Back in 2011, when the European debt crisis was roiling, the EU and international investors looking for safety bought up Swiss francs, driving up the currency’s value. The stronger Swiss francs started to hurt the country’s exports. At this time, policymakers in Switzerland decided to artificially cap their currency at 1.20 against the euro in an attempt to prevent the Swiss franc from becoming too strong. To maintain this cap, the Swiss central bank printed more francs and bought euros with them.
In an unanticipated move in January 2015, the Swiss National Bank suddenly freed its currency by removing the artificial cap it had placed on the Swiss franc against the euro a little over three years before. The move came as a shock for the forex market and sent the value of the franc, a stable and conservative currency soaring. In the ensuing chaos, many traders and brokers experienced huge losses.
Despite the unexpected decision and its fallout, investors still see the Swiss franc as a safe haven backed by a robust financial system and strong competitive economy.
Ways to Invest in the Swiss Franc
According to the Bank of International Settlements (BIS), the Swiss franc accounts for approximately 5% of global foreign exchange transactions. The U.S. dollar and Swiss franc pair (USD/CHF), known among traders as the "Swissie," is the sixth-most-traded currency pair. Here are some ways investors can get exposure to the Swiss franc.
Exchange Traded Funds (ETFs)
Launched in 2006, CurrencyShares Swiss Franc Trust (NYSE: FXF) tracks the price of the Swiss franc against the U.S. dollar. Accessing the Swiss markets through an exchange-traded fund is a good option for those looking to take advantage of tactical opportunities in the short-term and strategic opportunities in the long term without having to own a foreign exchange account.
This route offers some advantages to investors. Investors can use their traditional brokerage accounts to buy shares of the ETF. These are treated as regular securities with transaction costs far lower than currency spot market transaction costs. The shares are traded on the NYSE Arca daily which provides eligibility for a margin account as well as a short sale which is permitted by the U.S. Securities and Exchange Commission (SEC).
Just the way a stock market provides a platform to buy and sell stocks, the foreign exchange market (commonly known as FX or forex) is the platform for trading in different currencies. Forex platforms offer a wider variety of currency pairs.
Before plunging into forex, gain some basic knowledge of the market through a trading course or self-learning. From there, it’s simple to open a forex trading account and begin performing currency trades in the same way as stocks.
The forex markets operate 24-hours-a-day, 5-days-a-week which provides a lot of freedom for investors and traders. These markets also allow trading on margin, a way for participants to increase investment amounts without actually having the capital. When using margins, always remember that leverage works both ways—it can magnify both profit and loss.
The USD/CHF currency pair belongs to the category of major pairs (in other words, it is among the most widely traded and liquid currency pairs in the foreign exchange market).
Futures and Options
Another way to invest in the Swiss Franc is through futures and options. Many people mistakenly think the opportunity to trade these derivatives is only restricted to stocks. The foreign exchange market offers retail traders these derivative products which manage the risks associated with currency rate fluctuation while taking advantage of profit opportunities from changes in currency rates. Forex futures and options trading are popular hedging techniques commonly used by banks and financial institutions.
These products are traded at many exchanges around the world with Chicago Mercantile Exchange (CME) being the most popular. CME introduced Swiss franc futures in 1972 followed by Swiss franc options in 1985. Several brokers provide a platform to trade in Swiss franc futures and options.
The simplicity, flexibility, and ease provided by binary options have made them a popular choice for many in the forex market. Some of the popular currency pairs among binary options traders are the euro and U.S. dollar (EUR/USD), the British pound and U.S. dollar (GBP/USD), the euro and British pound (EUR/GBP), USD/CHF, and the U.S. dollar and Japanese yen (USD/JPY). The advantage of binary options is their simplicity. All you need to do is predict if the currency will move up or down.
The USD/CHF is a less volatile pair compared to other currency pairs, which can make predicting its movement difficult. Keep track of events that may influence the pair such as announcements regarding economic factors, monetary action by the U.S. Federal reserve, and actions by the Swiss National Bank. Other triggers to a movement between the two currencies can be gross domestic product estimates for either country, unemployment data, industrial growth figures, and national debt.
Experiment with a few other currency pairs and gain basic trading experience before moving on to the more challenging USD/CHF pair. You must also gain knowledge about technical analysis which will come in handy in forecasting the movement of the pair; these estimates must be backed by fundamental analysis.
The Bottom Line
Those interested in investing in Swiss francs must remember that foreign exchange markets, like stock markets, are prone to ups and downs which can have a negative impact on your position. Though the Swiss franc is usually stable above all, the Swiss National Bank’s recent decision to suddenly unpeg the value of the franc from the euro destabilized the currency, sending its value soaring. The episode is another reminder that currency movement is hugely dependent on the policies and actions of central banks in addition to macroeconomics.
While risks exist, the Swiss franc, resting on Switzerland’s sound economy and financial system, will continue to be one of the safer investment options.