How to Trade the EUR/CHF FX Pair: The Ultimate Guide

Trading the EUR/CHF pair refers to the buying and selling of the EU euro (EUR) against the Swiss Franc (CHF). This is often done with the goal of capitalising on fluctuations in the forex rate. It requires a solid grasp of historical contexts, geopolitical influences, and market mechanisms.

In this guide, we'll explore the evolution of the EUR/CHF exchange rate and uncover the factors that drive its movements. Additionally, we'll explore why trading EUR/CHF can present opportunities for forex traders seeking diversification and speculation.

Key Takeaways

• EUR/CHF's liquidity and popularity among traders make it attractive, but its lower volatility requires patience compared to other pairs.
• Understanding the history of the euro and Swiss franc provides insight into their roles in global finance, including the significant policy decisions like the 2011 pegging and subsequent abandonment.
• Central banking policies, interest rates, economic indicators, and the Swiss franc's safe-haven status are key factors influencing the EUR/CHF exchange rate.

Understanding the EUR/CHF Trade Dynamics

Trading the EUR/CHF is noteworthy due to Switzerland's role in global finance and the widespread use of the euro as a reserve currency. The euro is the second most traded currency worldwide*, and when paired with the Swiss franc, it creates a highly liquid trading pair.

The EUR/CHF exchange rate reflects the number of Swiss francs needed for purchasing one euro. For instance, at a rate of 1.0500, 1 euro holds a value equivalent to 1.05 Swiss francs.

The EUR/CHF pair is popular among traders due to its significant trading volume and regular market movement. However, because of its lower volatility, it typically requires more patience to trade compared to other pairs.

*As of April 2024.

History of the EUR/CHF Currency Pair

Analysing the evolving history of the EUR/CHF currency pair provides insights into the complex relationship between the EU euro and the Swiss franc, reflecting changes in economic conditions and geopolitical factors over extended periods.

History of EUR (The Euro)

The euro, symbolised by €, became the official currency of the European Union on January 1, 1999, replacing the ECU (European Currency Unit) at a one-to-one ratio. It transitioned from a noncash unit to physical notes and coins across participating nations on January 1, 2002. As of 2024, the euro serves as the standard currency in 20 out of 27 EU member states, forming the Eurozone.

Established in 1998, the European Central Bank (ECB) oversees euro management, aiming for price stability. Headquartered in Frankfurt, Germany, the ECB operates independently, with its president appointed for an eight-year term by consensus among all member nations. With an EU mandate, the ECB ensures the integrity of the euro, reflecting its importance as a global reserve currency.

History of CHF (The Swiss franc)

The Swiss franc, represented by CHF, became Switzerland's official currency in May 1850, replacing various regional currencies. Managed by the Swiss National Bank (SNB), the Swiss franc remains the only franc in Europe used in Switzerland, Liechtenstein, and Campione d'Italia. Known as the "swissie" among traders, it's also the seventh most traded currency globally*.

Following the 2008 financial crisis, demand for the Swiss franc as a safe haven rose, attracting interest from governments and financial institutions. Despite this, it's not considered a reserve currency, with most foreign trade settled in euros or US dollars. This distinction highlights the Swiss franc's unique role in global finance.

In a significant move in September 2011, the Swiss National Bank pegged the Swiss franc to the euro at 1.2000 Swiss francs per euro. However, this peg was abandoned in 2015, causing market upheaval and substantial losses for traders and firms as the Swiss franc floated freely. This event emphasised the Swiss franc's influence and the consequences of its policy decisions.

*As of April 2024.

EUR/CHF History

The EUR/CHF currency pair is a notable cross-currency option in the foreign exchange (forex) market, not involving the US dollar. Despite being classified as minor, EUR/CHF sees considerable activity in trading (20). While not as liquid as majors, it maintains a viable market presence.

A significant event for EUR/CHF occurred on January 15, 2015, when the Swiss National Bank (SNB) removed the cap on the Swiss Franc imposed in 2011. This cap had set the minimum EUR/CHF rate just above 0.83 euros, shielding it from falling below 1.2. The removal was intended to tackle economic and export challenges in Switzerland. This caused Switzerland's franc to appreciate almost 30 percent in value against the euro.

In June 2022, the SNB adopted a policy favouring implicit franc appreciation to mitigate imported inflation. Subsequently, the euro declined from approximately 1.05 to 0.95 against the franc. As of April 2024, the Swiss franc trades at around 0.97 francs per euro.

EUR/CHF stands out due to Switzerland's close ties with the Eurozone, despite not being an EU member. The Swiss Franc historically provided stability amid Eurozone economic turbulence, notably during Greece's debt crisis. Its correlation with the euro and relative stability make EUR/CHF appealing for trend traders observing extended directional movements.

What Influences the Exchange Rate of EUR/CHF

The exchange rate between the euro (EUR) and the Swiss Franc (CHF) is influenced by a multitude of factors, ranging from economic indicators to geopolitical events. As with any asset, the value of a currency is subject to fluctuations based on the principles of supply and demand, where an increase in demand for a currency leads to its appreciation, while an oversupply can lead to depreciation.

Central Banking Policies

Central banking monetary policies play a pivotal role in shaping the dynamics of the EUR/CHF currency pair. With the European Central Bank (ECB) focusing on maintaining price stability in the Eurozone and the Swiss National Bank (SNB) ensuring the same for Switzerland, their decisions directly impact the exchange rate.

For example, the abrupt decision by the SNB in January 2015 to abandon the peg to the euro led to significant upheaval in both stock and forex markets, with the Swiss franc experiencing a rapid appreciation against the euro.

Interest Rates and Exchange Rates

Interest rates and inflation differentials play a crucial role in shaping the movements of the EUR/CHF currency pair. Changes in interest rates directly impact currency values and exchange rates, as higher interest rates attract foreign capital and increase demand for the domestic currency. Central banks utilise interest rate adjustments to influence both inflation levels and exchange rates, thereby affecting the attractiveness of their respective currencies in the forex market.

Furthermore, the relationship between interest rates and inflation levels is key in understanding their impact on the EUR/CHF exchange rate. While higher interest rates typically lead to currency appreciation, high inflation rates can offset this effect, limiting the currency's strength.

Economic Indicators

Economic indicators wield significant influence over the EUR/CHF currency pair. Foreign traders gravitate towards stable countries with robust economic performance, diverting capital away from riskier regions, thereby impacting exchange rates. Positive reports on the economic growth of the Eurozone or its member nations can bolster the euro's strength in the forex market.

Gross Domestic Product (GDP) serves as a pivotal indicator driving movements in the EUR/CHF exchange rate. Given Germany's status as the largest economy in the Eurozone, fluctuations in its GDP tend to have the most substantial impact on the euro's valuation. Consequently, changes in GDP figures can trigger shifts in trader sentiment towards the euro, influencing its exchange rate against the Swiss franc.

Exports

Export and import activities play a significant role in shaping the dynamics of the EUR/CHF currency pair. Switzerland's reliance on exports makes it highly sensitive to the economic performance of its major trading partners, particularly in the Eurozone and the US. Any downturn in these economies can result in reduced business for Switzerland, impacting its currency's valuation against the euro.

Employment Rates

Low unemployment serves as a crucial indicator of a healthy economy, creating increased demand for the respective country's currency and potentially impacting the valuation of the euro against the Swiss franc. Traders may closely monitor employment data releases to assess the health of the Eurozone economy and anticipate corresponding movements in the EUR/CHF exchange rate.

Safe Haven Status

The safe-haven currency status of the Swiss franc significantly influences the EUR/CHF currency pair during periods of market instability. Traders seeking to mitigate risk often flock to assets like the Swiss franc, along with the US dollar and Japanese yen, until market conditions stabilise.

Historical events such as the European debt crisis of 2009-2013 and the global financial crisis of 2008 prompted substantial capital flows from affected regions to Switzerland, highlighting its role as a safe-haven status.

Ways To Trade the EUR/CHF

There are several ways to trade the EUR/CHF currency pair, here are a few widely used ones:

Spot Forex Trading

In spot forex trading, currencies are exchanged immediately based on current market rates, such as buying euros and selling Swiss francs in the EUR/CHF pair.

Forex Futures Trading

Forex futures contracts involve outlining specific prices and dates for currency transactions, offering a structured means to speculate on EUR/CHF movements.

Forex CFD Trading

Trading EUR/CHF through contracts for difference (CFDs) allows traders to speculate on price fluctuations without owning the underlying assets. With CFDs, traders capitalise on the variance between the asset's opening and closing prices. This method requires only a fraction of the asset's total value to initiate a position, due to the leverage provided.

Leverage, inherent in CFD trading, magnifies potential gains and losses. The utilisation of leverage allows traders to command larger positions while committing a smaller upfront cost by providing a "margin" of the total position. However, it's crucial to be mindful of the amplified risks associated with leverage as it can also magnify losses.

In CFD trading, profits or losses hinge on the difference between the opening and closing prices of a trade. If the closing price surpasses the opening price in a buy contract, the trader profits from the difference. Conversely, if the closing price falls below the opening price, the trader incurs a loss.

Moreover, CFDs offer traders the flexibility to take both long and short positions on currency pairs like EUR/CHF. This allows traders to speculate on both the upward and downward movements in the market. Unlike spot trading, where shorting can be more complex, CFD trading streamlines the process for both long and short trades.

Trading Strategies for EUR/CHF

Traders employ various methods to determine opportune moments for trading and decide whether to buy or sell a currency pair. Two primary approaches are fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis for EUR/CHF involves examining broader economic, political, and global factors to understand potential currency fluctuations. This approach assists traders in evaluating trade values and predicting future price movements.

Technical Analysis

Technical analysis focuses on studying price changes to anticipate future market trends. This method can apply to any asset with historical data. For example, technical indicators like the moving average convergence/divergence (MACD) provide insights into trend directions, indicating whether the market sentiment is bullish or bearish.

Bollinger Bands, another aspect of technical indicators, serve two main purposes: measuring volatility and identifying potential price trends. They also help in identifying overbought or oversold market conditions, providing valuable guidance for traders.

Both fundamental and technical analysis offer insights that traders leverage to make informed decisions in the dynamic world of currency trading.

EUR/CHF Trading Hours

The forex market is accessible at any time during weekdays due to its global nature but does not operate on weekends. Not all hours offer the same trading opportunities; the best times coincide with heightened market activity when multiple markets are open simultaneously.

Trading during major economic releases or news events can significantly affect market volatility. Sudden announcements, particularly those conflicting with forecasts, can quickly alter currency values, sometimes within seconds. It's crucial for traders to stay informed to seize potential opportunities.

Trading hours on the Plus500 platform may not always align with the timing of major economic releases or news events.

Risk Management Tools for EUR/CHF

Effective risk management is essential in Forex trading, given its fast-paced and volatile nature. Additionally, staying informed about market dynamics and potential catalysts is crucial for managing risk effectively.

Using tools like 'Close at Profit' (Stop-Limit) or 'Close at Loss' (Stop Loss) orders provides traders with control over their positions' closure parameters. These orders enable setting specific rates at which positions automatically close to protect potential profits or minimise potential losses.

Guaranteed stop orders offer an absolute limit on potential losses, ensuring positions close at specified prices regardless of market movements, thus mitigating slippage risk. However, it's important to note that a guaranteed stop may not be available for all instruments, and there is a fee associated with usage.

Trailing stop orders is another useful tool for managing risk by locking in potential profits as prices move favourably. These orders automatically adjust the closing price of a position as the market moves, allowing traders to secure gains while still allowing for potential upside.

Conclusion: Understanding EUR/CHF Dynamics

Trading EUR/CHF presents a compelling opportunity for forex traders seeking diversification and speculation within the dynamic foreign exchange market. With its liquidity and popularity among traders, the EUR/CHF pair offers ample trading volume and regular market movement.

However, due to its lower volatility compared to other pairs, it's essential to approach trading this pair with patience.

By incorporating both fundamental and technical analysis into trading strategies, traders can make informed decisions and navigate the complexities of the forex market effectively. Ultimately, success in trading EUR/CHF requires diligence, adaptability, and a comprehensive understanding of the factors driving its movements.

EUR/CHF FAQs

What are the advantages of trading the EUR/CHF currency pair?

EUR/CHF may be an attractive forex pair due to its liquidity, popularity among traders, and regular market movement despite having lower volatility compared to other pairs.

How do interest rates and inflation differentials impact the movements of the EUR/CHF currency pair?

Changes in interest rates affect currency values, as higher rates attract foreign capital and increase demand for the domestic currency, influencing exchange rates.

Why is Switzerland's safe-haven status significant for the EUR/CHF currency pair?

Switzerland's safe-haven status influences the EUR/CHF pair during market instability, as traders may seek assets like the Swiss franc to mitigate risk until conditions stabilise.

What are some risk management strategies recommended for trading EUR/CHF?

Utilising tools like 'Close at Profit' or 'Close at Loss' orders, along with Guaranteed Stop and Trailing Stop orders, can help traders manage risk effectively in EUR/CHF trading.