5 factors behind fluctuations in the Swiss franc exchange rate
As so-called “floating” currencies, the Swiss franc and the world’s major currencies (the dollar, the euro, the yen, etc.) are traded against one another at a variable rate, the value of which depends purely and simply on the law of supply and demand in the foreign exchange market (Forex).
Thus, whilst the law of supply and demand governs fluctuations in the Swiss franc exchange rate, it is the factors driving changes in supply and demand that actually explain these fluctuations.
The main factors are as follows:
- geopolitical factors;
- the SNB’s policy;
- the economic situation in Switzerland;
- the value of the counterparty currencies;
- hedging activities by companies and investors.
We go into detail about all of them later in the article!
Find out what the five main factors are behind exchange rate fluctuations between the Swiss franc and other currencies, to gain a better understanding of how this currency fluctuates.
1. Geopolitical factors
Geopolitical events are also likely to cause fluctuations in the Swiss franc’s exchange rate, given the currency’s status on the international stage.
Indeed, the Swiss franc has been viewed by investors as a safe-haven asset for many years. And with good reason: having weathered numerous crises whilst maintaining a high value on the foreign exchange market, it has enabled them to protect their savings from financial turmoil. When risk aversion rises and investors become anxious, the Swiss franc tends to appreciate, but when market fears subside, it tends to depreciate.
It is therefore indeed during times of global geopolitical or economic crisis that the Swiss franc tends to strengthen, as investors seek refuge in the Swiss currency. Conversely, when the geopolitical outlook brightens again, they tend to invest in riskier currencies (such as emerging market currencies).
This is precisely the situation the Swiss franc faced at the start of 2021, in the midst of the Covid-19 crisis: as the UK and US gradually lifted health restrictions and reopened their economies following the acceleration of vaccination programmes, investors turned away from the Swiss franc, pushing it to its highest level against the euro since July 2019, at 1.11 euros to the Swiss franc.
2. The SNB’s policy
As a key factor influencing fluctuations in the Swiss franc exchange rate, the monetary policy pursued by the Swiss National Bank (SNB) is closely monitored by investors.
Central banks around the world have a major impact on the exchange rate of their national currency: depending on their specific objectives, they implement specific measures. Whilst the US Federal Reserve (Fed) seeks to support growth whilst keeping inflation under control, the SNB has historically sought to limit the appreciation of the Swiss franc.
This is precisely why it introduced a floor rate between the euro and the Swiss franc, which remained in place from 2011 to 2015, with the aim of maintaining a minimum exchange rate of 1 euro to 1.20 Swiss francs, following a long period of appreciation of the Swiss currency.
3. The economic situation in Switzerland
One of the main factors likely to have a direct impact on the value of the Swiss franc is, of course, the state of the Swiss economy itself.
GDP growth, unemployment rates, levels of public debt and the country’s trade balance… Investors scrutinise a wide range of macroeconomic indicators, seeking above all to invest in countries where growth is booming!
When Swiss economic indicators are positive, investors are naturally drawn to the national currency and seek to buy it, sometimes on a massive scale, which generally leads to an appreciation of the Swiss franc on the international foreign exchange market.
As Switzerland is a wealthy country with a trade surplus and a relatively low unemployment rate that has persisted for many years, its national currency enjoys investor confidence, which explains its strength against other currencies on the market.
4. The value of the counterparty currencies
Finally, the exchange rate of the Swiss franc is, of course, likely to fluctuate depending on the value of the other international currencies used to express the exchange rate.
Thus, the value of the US dollar (USD), the pound sterling (GBP), the euro (EUR) and the Japanese yen (JPY), which fluctuate constantly on the foreign exchange market, have a direct impact on the value of the Swiss franc.
For example, in the case of the CHF/EUR exchange rate, the more the value of the euro rises, the more the exchange rate between the two currencies falls, and vice versa.
What is more, certain currency pairs tend to move in the same direction. This is particularly the case with the EUR/CHF and EUR/USD pairs during certain periods, as the Swiss franc is then, to a certain extent, correlated with the US dollar.
5. Hedging by businesses and investors
Economic actors also have a significant impact on the Swiss franc exchange rate, particularly through their hedging activities against exchange rate risk.
Companies operating internationally are directly affected by this significant financial risk, as they are exposed to exchange rate fluctuations on their foreign currency transactions. To hedge against this, however, they can employ various strategies to mitigate foreign exchange risk, some of which involve buying or selling currencies and therefore inevitably influence the foreign exchange market.
As you will have realised: whilst the story reported retrospectively by the press, following a significant fluctuation in the Swiss franc exchange rate, tends to single out just one factor as the cause of the observed fluctuation, exchange rate movements are in reality always driven by multiple factors.
As they are caused by the specific combination of a whole range of factors, these fluctuations are complex and difficult to predict. This is why it is essential, for both individuals and businesses, to be aware of their exposure to foreign exchange risk!
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