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Trading the Swiss Franc

The Swiss Franc (SFR) has long been considered a currency for institutional investors to buy when they need to get out of riskier assets, particularly during times of financial crisis. Heavy buying of the Swiss franc will happen at times of stress, when investor confidence in other assets like shares or commodities is ebbing.

The Swiss franc is not particularly popular amongst central banks, and has rarely accounted for more than 0.3% of global foreign exchange reserves in the last 20 years. It is more popular with private investors, who still make use of bank accounts denominated in the currency, even though the macroeconomic case for holding Swiss francs is less powerful than it was in the late 1990s.

Switzerland has traditionally been regarded as a conservative and neutral country where it is safe to keep your money, hence the success of its private banking industry. Switzerland has also steered clear of EU membership and the eurozone. It is this neutrality policy of the country’s successive governments that have led its currency to be favoured by investors.

The Swiss franc used to be backed by gold reserves to the tune of 40%, a legal requirement laid down by the Swiss government, but this was abandoned in 2000 following a referendum. In recent years it has traded very closely to the euro, maintaining a rate of approximately 1.55 to the euro. Switzerland remains heavily influenced by the economic fortunes of the Eurozone, as it is surrounded by Eurozone countries and counts the EU as its primary trading partner.

The Swiss franc will tend to rally at times of political turbulence, not just when there are financial problems. Look for it to gain strength against other major currencies when there is increasing political instability on a global scale.

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