Who should consider trading the British pound/Swiss franc?
Anyone with strong views on the likely relative performance of the British and Swiss economies. Both have big financial services sectors and specialist export industries, but their fortunes frequently diverge.
Someone who has studied the history of pound/franc interaction and believes they can forecast the next moves.
Day traders. The pound/franc rate is a natural play for fleet-footed market operators, representing the crossing point between two very different currencies – one where profit can be found.
What do I need to know about the Swiss franc?
The Swiss franc is the ‘hardest’ – i.e. most inflation-proof – currency in the world. It has the ability to retain its value, easily exceeding the more usually cited German mark which became part of the euro in 1999. Until 2000, the Swiss National Bank (SNB) explicitly tied the amount of currency in issue to the level of the country’s gold reserves, making it the last advanced country in the world to do so.
The strength of the franc is a constant pre-occupation for authorities in Berne, the Swiss capital, and Zurich, home of the SNB. Capital inflows push up the value of the franc, making life harder for Swiss exporters, as their goods become more expensive and thus less competitive when priced in local currency.
For this reason, the SNB has sought to hold down the value of the franc. It pegged the franc to the euro but market pressure proved irresistible and, in January 2015, it unpegged the currency which promptly soared in value, leading to cries of anguish from exporters.
Since then the SNB has pursued a negative interest-rate policy and conducted wide-scale operations in currency markets, selling the franc and buying other currencies - including sterling - to try to hold down its value.
There are two key differences with British monetary policy. While both countries have very low-interest rates, the UK rate is still positive (0.25 per cent) and the next move is expected to be up, against minus 0.75 per cent in Switzerland.
Perhaps more importantly, the Bank of England has not been active in foreign exchange markets for domestic policy reasons in 25 years.
Trading the British pound and the Swiss franc
With Britain on its way out of the European Union – an organisation that Switzerland declined to join in the first place – sterling and the Swiss franc may seem a natural currency pair.
Unencumbered by being part of a formal currency pact, or even of being pegged, as is the Danish krone, to a larger currency, these two free-floating denominations were surely ‘made to trade’?
Well, perhaps. As we shall see, there are as many differences between these two currencies as there are similarities. Without such differences, perhaps, there would be little on which to trade, but they do need to be fully understood if such trading is to have a chance of success.
Would trading the British Pound/Swiss Franc be right for you? Let’s look at ways in which it might be done.
What affects the relationship between the British pound and the Swiss franc?
Political events in the UK. Switzerland’s highly-devolved and long-established democratic system makes it far less crisis-prone than Britain, a G7 economy with an adversarial political culture. The July 23, 2016, vote to leave the European Union saw sterling’s purchasing power against the franc tumble from nearly 1.46 ahead of the referendum to a low of 1.19.
The interaction between Switzerland and its nearest neighbours, the countries of the Eurozone, to which half its exports are bound. Since the onset of the crisis, sovereign debt worries and slow or no growth in these countries have acted as a drag on economic activity in Switzerland and affected the value of the franc.
The ebb and flow of Anglo-Swiss trade, which will affect the relative value of the franc and the pound. This is worth more than £31.9 billion a year, not enormous when you consider that the UK’s total bilateral trade with the EU is worth more than £500 billion, but still significant.
Alignment, or lack of it, between the UK and Swiss monetary policies. If British rates rise, that will have a marked effect on the franc/pound exchange rate.
The basics of trading the British pound/Swiss franc
There are 3 ways to trade on the relationship between sterling and the Swiss franc.
The simplest method would be to exchange one currency for the other, through a trading account, a bank account or, most basic of all, physically swapping one pile of banknotes for another, perhaps at a high street currency exchange.
Another way would be through futures and options, derivative products that let you take a position on exchange-rate movements without the need to possess the currency itself. This can be a risk if the rate moves sharply against the position that you have taken.
Contracts for difference (CFDs), which have become the most popular way to trade financial markets of all types. As the name suggests, a CFD is a contract between a trader and a broker, with each promising to pay the other the difference between the price of an asset on the day the contract is signed and the price on the day that it is terminated. They are leveraged products, meaning you can gain exposure by investing only a percentage of the full value of the trade you want. Whilst this gives opportunity for greater profit, you risk losing more than your deposit if the market moves against you. A second risk is that rapid price changes can cause your account balance to change quickly. If you do not have enough funds in your account to cover these situations, there is a risk your position may be closed automatically when your balance falls below a certain level, known as the close-out level. Stop-orders can limit risk but, in fast moving markets, prices might rise above or fall below the desired level before a sale can be executed. This may increase losses.
eToro offers CFDs in both the GBP and CHF
What should you consider when trading the franc and the pound?
Both are stable currencies issued by well-established democratic states. Markets in both currencies are deep and liquid, making for ease of trading. But they are very different sorts of currencies issued by countries with very different policy priorities. Getting to grips with these differences is key to a successful trading strategy.
Is trading the franc/pound right for you?
If you have a well thought-out view of the likely movement of the franc against the pound, based perhaps on a wide reading of previous trading patterns, then it may be.
*This content is intended for educational purposes only, and shouldn't be considered investment advice.
*Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.