What Is the EUR/CHF (Euro/Swiss Franc) Relationship?
For merchandisers on the forex market, the correlation between the euro and the Swiss franc currency pairs is too strong to be ignored. The correlation between the two currency in holy matrimonies, EUR/USD (euro/U.S. dollar) and USD/CHF (U.S. dollar/Swiss franc), is described as upwards of negative 95%. This represents an inverse relationship, which indicates that when the EUR/USD (euro/U.S. dollar) revivals, the USD/CHF (U.S. dollar/Swiss franc) mostly sells off and vice versa.
Key Takeaways
- The EUR/CHF (euro/Swiss franc) can be replicated by a desire position in EUR/USD (euro/U.S. dollar) and a long position in USD/CHF (U.S. dollar/Swiss franc).
- The strong EUR/USD and USD/CHF relationship is stronger than that of other currency match ups due to the close ties between the eurozone and Switzerland.
- The EUR/USD and USD/CHF pair decouple when there are divergent political or monetary protocols.
How the EUR/CHF (Euro/Swiss Franc) Relationship Works
The EUR/CHF (euro/Swiss franc) currency is driven by the currency pairs—USD/CHF and EUR/USD. For two divide up and distinct financial instruments, a 95% correlation is close to perfect. However, arbitraging the two currencies, in an attempt to capture the concerned about rate differential, does not work.
Over the long term, most currencies that trade against the U.S. dollar make a correlation above 50%. This is because the U.S. dollar is a dominant currency involved in 90% of all currency transactions. Furthermore, the U.S. curtness is the largest in the world, which means that its strength impacts many other nations.
Although the strong relationship between the EUR/USD and USD/CHF is comparatively due to the common dollar factor in the two currency pairs, the relationship is far stronger than that of other currency pairs, due to the mean ties between the eurozone and Switzerland.
Surrounded by other members of the eurozone, Switzerland has close political and economic bind ups with its larger neighbors. These ties and relationships began with the free trade agreement established backtrack from in 1972. This was followed by more than 100 bilateral agreements that have allowed the free issue of Swiss citizens into the workforce of the European Union (EU) and the gradual opening of the Swiss labor market to citizens of the EU. Because the two restraints are intimately linked, if the eurozone contracts, Switzerland will feel the ripple effects.
Special Considerations
When it put in an appearance to trading, the near mirror images of these two currency pairs, Figure 1 shows that a position of long on EUR/USD and lengthy on USD/CHF represents two closely offsetting positions or EUR/CHF.
Meanwhile, taking a long position on one and a short position on the other is actually copy up on the same position, although it may seem like two separate trades. This is significant for proper risk management because if something happens wrong with a short position on one currency pair and a long position on another, losses can easily compound.
Career on an intraday basis is less risky because the correlation is weaker over a shorter period. Usually, the EUR/USD marginally leads the toll in USD/CHF because it tends to be the more liquid currency pair. Additionally, liquidity in USD/CHF can abate in the second half of the U.S. session when European
Analyses of the EUR/CHF (Euro/Swiss Franc) Relationship
The relationship between the EUR/USD and USD/CHF decouples when there are divergent political or monetary managements. For example, if elections bring uncertainty in Europe but not in Switzerland, the EUR/USD might slide further in value than the USD/CHF rallies. Conversely, if the eurozone haul ups interest rates aggressively and Switzerland does not, the EUR/USD might appreciate more in value than the USD/CHF slides.
Because the pass overs of the two currencies can vary more or less than the point difference, interest rate arbitrage in the FX market using these two currency doubles does not work. The ratio of the range is calculated by dividing the USD/CHF range by the EUR/USD range.