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CHF/JPY - Swiss Franc Japanese Yen
Having at least a basic understanding of the fundamentals of the Swiss franc is essential for anyone trading the currency. For example, in Turkey was having a balance of payments problem that caused its currency and credit and equity markets to decline.
And usually when traders make bad trades, the losses tend to compound on themselves because it clouds their judgment and they may start taking more risk to recoup previous losses. This usually exacerbates the problem. In short, to whatever extent possible, studying fundamentals and longer-term price patterns on the assets you trade is supremely helpful for day traders.
But I can assure you that staying abreast of these matters is very important. This is largely within the purview of monetary policy run by the central bank who can influence this. It is doing this because it wants to boost inflation to rid the country of its deflationary problems that have plagued it for the better part of the past decade. First, I should explain why deflation is bad because this is an important part of understanding the current dynamics surrounding fundamentals of the Swiss franc.
If monetary policy is run with a deflationary bias, this means you will run an economy that never runs into its capacity constraints — e. Some amount of inflation will always be present when this is achieved because of structural flaws in our economic system stemming from imperfect competition, such as monopoly, duopoly, and oligopoly. Therefore, some amount of inflation will always be present when full employment is truly reached. This is why inflation targeting as a central bank mandate is a no-brainer.
Unemployment as a whole will be high, because companies rarely cut nominal wages. Instead, they tend to lay off labour. Spending will decline, cash hoarding will become more common, and GDP — in developed economies, consumption is the majority of GDP — will contract and living standards will decline as a direct result. Deflation produces permanent economic anaemia as not enough money and credit are being spent on goods, services, and financial assets.
These cycles tend to be self-reinforcing. Lower incomes lead to lower spending, which leads to lower capacity to borrow, which produces even lower incomes and spending and overall output in a downward spiral. Equity markets will remain below their peak with declining incomes and contractive or insufficiently expansionary monetary policy.
This is obviously not good for domestic wealth. This can seem counterintuitive because it means that the buyer has to pay in order to hold short-term debt. In deflationary environments, it can make sense to hold a negative yielding bond if your real inflation-adjusted return is positive. In other words, if the negative rate on the bond is higher than the rate at which prices are declining on goods and services in the economy.
Theoretically, this should also boost spending and investment behaviour. This helps stimulate outflows exports by working to make the currency cheaper. The Swiss franc becomes less desirable when its rate of return — and the rate of return of the assets that are denominated in francs — is not attractive.
Instead of buying domestic assets, the SNB buys outside assets, such as US large cap stocks, to push out liquidity and weaken the franc. When you buy domestic assets, this has the effect of increasing the value of the currency because these assets are what create demand for it. The SNB is doing the reverse process.
It has a fiscal surplus and large current account surplus. It also has low indebtedness, high wages, and high GDP per capita. This makes the Swiss franc in demand as it is a structurally sound currency.
You get 0. That means in strong global economic environments, the franc is often used by traders as the short leg in buying currencies with high interest rates. This is called carry trading. This borrowing dampens demand for it because it is in effect being sold, which decreases its price. But when the market is weak you often see strong buying activity in the franc because traders unwind their carry trades.
These types of trades often involve being long a riskier asset or currency. For example, note the large spike in the franc to emerging market equities ratio in during the financial crisis. This is a product of carry trades being unwound. Short positions in the franc were covered — effectively francs were bought — causing a large rally. The most broadly helpful thing to know about the fundamentals of the Swiss franc is that it serves as a safe haven currency.
This is because its low interest rates make it attractive to borrow in, and covering these borrowed funds during periods of market turmoil means buying activity will take place.
Therefore, many consider the Swiss franc as a market hedge, similar to gold, or else a basic way to diversify a portfolio. In good times, you will typically see it appreciate relative to positive-carry assets, such as currencies like the Australian dollar AUD or the emerging market equities example.
These rates of depreciation in the franc will generally be of a steadier magnitude than the sharp rates of appreciation during market weakness, given contractions tend to be much swifter and volatile than good economic periods.
There was another drop in to late as commodity markets became oversupplied and dropped in price from to early Australia is a big commodity exporter and its currency is therefore sensitive to fluctuations in commodity markets.
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Having at least a basic understanding of the fundamentals of the Swiss franc is essential for anyone trading the currency. For example, in Turkey was having a balance of payments problem that caused its currency and credit and equity markets to decline. And usually when traders make bad trades, the losses tend to compound on themselves because it clouds their judgment and they may start taking more risk to recoup previous losses.
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Fundamentals of The Swiss Franc (CHF)
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