Influencing Factors on USD/CHF
SWISS NATIONAL BANK (SNB) – The Swiss Central Bank has maximum independence in setting monetary and exchange rate policy. Unlike most Central banks, the SNB does not use a specific money market rate to guide monetary conditions. Until fall 1999, the Bank used foreign exchange swaps and repurchase agreements as the main instruments to impact money supply and interest rates. Liquidity management has characteristically affected the Swiss franc due to the use of Foreign Exchange Swaps. If the Bank wishes to inject liquidity, it buys foreign currency (primarily dollars) against Swiss francs, thereby pressuring the currency. SNB officials can affect the Swiss Franc by making occasional remarks on liquidity, money supply or the currency itself.
INTEREST RATES – The SNB uses the discount rate to announce changes in monetary policy. These changes have a significant impact on the currency. The discount rate, however, is rarely used at the Bank’s discount facility.
ECONOMIC DATA – The most important economic data items released in Switzerland are: M3 (broadest measure of money supply), CPI, unemployment, balance of payments, GDP and industrial production.
CROSS RATE EFFECT – USD/CHF is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates), such as EUR/CHF or GBP/CHF. To illustrate: A rise in GBP/CHF that is triggered by an interest rate hike in the UK, could extend franc’s weakness against other currencies, including the dollar.
ADDITIONAL FACTORS – 3-month EUR/CHF Deposits and Futures Contract
IMPORTANT NOTE: Due to the proximity of the Swiss economy to the Euro-Zone (specifically Germany), the Swiss franc has exhibited a considerably positive correlation with the euro. The relationship is most prominent in the highly negative correlation between USD/CHF and EUR/USD. To illustrate, a sudden move in EUR/USD (triggered by a major fundamental factor) is most likely to cause an equally sharp move in USD/CHF in the opposite direction. The relationship between these two currency pairs is one the strongest in currency markets.