We’ll now discuss the popular and liquid EURCHF pair, taking a look at the economies of the two nations. Before proceeding you can take a look at the EURCHF chart below which is being updated live as traders create trends in the market.
The Euro is the common currency of most of the EU-member nations. It is also the de-facto currency of some African and Balkan nations which have been ravaged by warfare in the last two decades. It is a free-floating currency, but the European Central Bank has the implicit duty of protecting its value. The Eurozone has a roughly balanced external account.
The Euro replaced the national currencies of EU-nations on January 1st 1999, culminating a process begun with the Maastricht Treaty in the 1992, and today it is widely regarded as a future alternative to the U.S. dollar as a global reserve currency. It plays a large role in the creation of forex trends, as speculators and investors channel dollars to Euros for diversification and risk management purposes. It is also the second most important reserve currency in the world, with more than a quarter of central bank assets denominated in Euros, rising from about 18% in 1999.
The Swiss Franc
The Swiss Franc has a history stretching back to 1850. Before that date, each of the various entities forming the Swiss Confederation were allowed to issue their own currencies in their respective denominations.
Today Switzerland has a diverse economy with specialization in finance, high-technology, and manufacturing. Much of the nation’s trade is conducted with the EU, with which the Swiss run a significant trade surplus. Switzerland was boasting a double surplus in current account and the public budget until the end of 2008, but as a consequence of the massive public spending and nationalization of the bad assets of the finance sector, it is estimated that the budget surplus will disappear in the future.
The Swiss franc is also a very minor reserve currency, with about 0.1% of global reserves denominated in the Franc, tracking the Japanese yen at about 3.5% by 2008 numbers according to the IMF.
Trading the EURCHF pair
The EURCHF pair is a typical carry pair due to the strong divergence between the main policy goals of the Swiss National Bank (SNB) and the European Central Bank. Although both institutions aim at price stability explicitly, due to Switzerland’s smaller size and strong dependence on exports, the SNB is far more sensitive to currency movements that may be disadvantageous to exporters. The European Union, by contrast, is many times larger both economically and population-wise, which compels the ECB to adopt a more consistent approach aimed towards price stability, mostly ignoring currency price changes.
Traders exploit this fact by carry trading the EURCHF pair. The higher degree of hawkishness of the ECB usually leads to an interest rate differential favoring the Euro. Different market conditions will no doubt cause differing levels of volatility, but often EURCHF is more volatile than the EURUSD pair, while being less volatile than EURJPY.
The pair is influenced by most of the major statistical releases relating to the EU or Switzerland, with news from the EU receiving a slightly heavier weighting in the market’s evaluation.
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