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).
• The Swiss franc's exchange rate is driven by supply and demand, shaped by five main factors: geopolitics, SNB policy, the Swiss economic climate, counterpart currencies, and hedging activity.
• During geopolitical or global economic crises, the franc appreciates as a safe haven; it depreciates once tensions ease.
• In early 2021, for instance, the gradual lifting of Covid restrictions led investors to move away from the franc, pushing it to 1.11 EUR/CHF — its highest level since July 2019.
So, since the law of supply and demand governs the fluctuations in the Swiss franc exchange rate, it is actually the factors driving supply and demand that truly explain these variations.
These are the main factors:
- geopolitical factors;
- the SNB’s monetary policy;
- the economic situation in Switzerland;
- the value of counterpart currencies;
- hedging operations by companies and investors.
We cover all of them in detail further on in this article!
Discover the 5 main causes behind exchange rate fluctuations between the Swiss franc and other currencies, to better understand the movements of this currency.
1. Geopolitical factors
Geopolitical events can also cause the Swiss franc exchange rate to fluctuate, owing to the status of the Swiss currency on the international stage.
Indeed, for many years the Swiss franc has been seen by investors as a safe-haven currency. Having weathered numerous crises while retaining a high value on the foreign exchange market, it has allowed them to protect their savings from financial turmoil. When risk aversion rises and investors become worried, the Swiss franc tends to appreciate, but when market fears ease, it tends to depreciate.
It is therefore precisely during a geopolitical or global economic crisis that the Swiss franc tends to strengthen, as investors take refuge in the Swiss currency. Conversely, when the geopolitical outlook brightens again, they tend to invest in riskier currencies (emerging-market currencies, for example).
This is exactly the situation the Swiss franc experienced in early 2021, in the midst of the Covid-19 crisis: as England and the United States gradually lifted health restrictions and reopened their economies following accelerated vaccination campaigns, investors turned away from the Swiss franc, driving it to its highest level against the euro since July 2019, at 1.11 euros per Swiss franc.
2. The SNB’s monetary policy
As a major factor influencing fluctuations in the Swiss franc exchange rate, the monetary policy conducted by the Swiss National Bank (SNB) is closely watched by investors.
Central banks around the world have a major impact on the trajectory of their national currency’s exchange rate: depending on their own objectives, they implement specific measures. Whereas the US Federal Reserve (Fed) seeks to support growth while 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 lasted from 2011 to 2015, in order to maintain a minimum ratio 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 first factors likely to directly influence the value of the Swiss franc is, of course, the state of the Swiss economy itself.
GDP growth, the unemployment rate, public debt levels, and the country’s trade balance… Numerous macroeconomic criteria are closely watched by investors, who above all seek to invest in countries with strong growth prospects!
When Swiss economic indicators are positive, investors are naturally drawn to the national currency and seek to buy it, sometimes even 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 positive trade balance and a relatively low unemployment rate for many years, its national currency benefits from investor confidence, which explains its strength against other market currencies.
4. The value of counterpart currencies
Finally, the Swiss franc exchange rate can of course also vary 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), or the Japanese yen (JPY), which fluctuate constantly on the foreign exchange market, directly affects the valuation of the Swiss franc.
For example, in the case of the CHF/EUR pair, the more the value of the euro rises, the more this exchange rate between the two currencies falls, and vice versa.
What’s more, certain currency pairs tend to move in the same direction. This is notably the case for the EUR/CHF and EUR/USD pairs during certain periods, with the Swiss franc then being, to some extent, correlated with the US dollar.
5. Hedging operations by companies and investors
Economic players also have a significant impact on the Swiss franc exchange rate, particularly through their hedging operations against currency risk.
Companies operating internationally are directly affected by this major financial risk, as they are exposed to exchange rate fluctuations in their foreign currency transactions. To hedge against it, however, they can use various currency risk reduction strategies, some of which involve buying or selling currencies, and therefore inevitably influence the foreign exchange market.
You will have understood: while the story reported after the fact by the press, following a significant fluctuation in the Swiss currency’s exchange rate, tends to attribute the observed movement to a single factor, exchange rate movements are in reality always multifactorial.
Being caused by the specific conjunction of a whole range of factors, these fluctuations are complex and difficult to anticipate. This is why it is essential, for individuals and businesses alike, to be aware of their exposure to currency risk!
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