SWISS FRANC

The Swiss franc represents an interesting niche among the global floating currencies.
Over the years, it has been used as a safe-haven currency because it had a link of
convertibility. This link was abandoned in 2000, but the Swiss National Bank (SNB), the
central bank, still holds 30 percent of its assets, about 1200 tons in gold. Even though it
is more than 70 years after the global collapse of the gold standard in 1936, there is still
an association of gold and the Swiss franc.
In a speech commemorating this anniversary, John Pierre Roth, chairman of the governing
board of the SNB, said the following:
As I said at the outset, the role of gold has faded over the years. But gold had an
afterlife long after it ceased to be relevant in any form for the conduct of monetary
policy. First and foremost, the legal link between the Swiss franc and gold continued to exist until very recently. The constitutional changes that severed
this link took effect in 2000, followed, within the same year, by the corresponding
changes in the relevant law. The new law no longer includes an obligation
on the part of the SNB to redeem banknotes for gold—an obligation which—in
practice—had been suspended for decades. Moreover, it has abolished the minimum
gold coverage of the banknotes in circulation and the gold parity of the Swiss
franc. With these changes, gold finally became a normal and marketable asset for
the SNB. In May 2000, the SNB began to sell part of its gold stock. About 50 percent
of the gold once owned by the SNB has now been sold. I should emphasise that the
SNB will continue to hold gold as a monetary reserve, but the legal relics of the gold
standard era no longer immobilize the gold stock as they did for decades (Opening
remarks, conference, “Seventy Years After: The Final Collapse of the Gold Standard
in September 1936,” University of Zurich).
The Swiss franc’s personality is not limited to an orientation to gold. It reflects the
fact that it is embedded in the European economy. From a trade-weighted point of view
the most important currency impacting the franc is the euro followed by the U.S. dollar
(see Table 7.8).
Trading this currency offers several alternative strategies. It can be used as a hedge
against the EURUSD trade; it can also be used as a method for buying dollars. In fact, in
trading the news, the hedge effect of the USDCHF against the EURUSD is employed to
implement a trading the news strategy. The Swiss franc also can be used as an alternative
to the yen for those traders looking to construct a carry trade. They would be selling the
Swiss franc, which has an associated low interest rate of 2.5 percent, and then buying
currencies that have higher interest rates such as the New Zealand dollar, the Australian
dollar, and even the British pound. Finally, by understanding the state of the Swiss economy
and evaluating the trade-weighted index charts (Figure 7.15), the trader can decide
whether to buy or sell the Swiss franc (“Export Accessibility in Switzerland,” Switzerland
Economic Studies, 2000, p. 21 [AN 5847930]).




By ABE COFNAS