Trading the USD/CHF Currency Pair – A Beginner’s Guide
The United States dollar/Swiss franc currency pair denotes the exchange rate between the U.S. dollar and the Swiss franc and expresses it as the number of Swiss francs needed to buy one U.S. dollar.
For example, if the USD/CHF exchange rate is 0.95000, it means you need 0.95 Swiss francs to buy one U.S. dollar. In this pair, the U.S. dollar is the base currency, and the Swiss franc is the quote currency.
With a large daily turnover of about $180 billion, the USD/CHF is the seventh most traded currency pair in the world. The total daily turnover in the forex market is approximately $5.1 trillion, which means the USD/CHF represents about 3.5 percent of this colossal amount.
History of the Swiss Franc
The Swiss franc was officially established as the nationally recognized Swiss currency on May 7, 1850, when the Swiss Federal Constitution passed the Federal Coinage Act which gave the Swiss federal government the right to mint this currency.
Swiss Franc Coins
The first Swiss banknotes were printed in 1907.
The Swiss franc is the legal tender and currency of Liechtenstein and Switzerland. It is also the legal tender in Campione d’Italia, an Italian exclave.
History of the United States Dollar
The U.S. dollar has been the United States’ standard monetary unit for more than 200 years. It has also been the world’s official reserve currency since the Bretton Woods Agreement came into force in 1944.
How the USD/CHF is Traded
Although there are other ways to trade this currency pair, we’ll focus only on how it’s done with retail forex trading.
USD/CHF Lot Size
A standard lot in forex is 100,000 of the particular currency pair. However, most retail forex brokers offer lot sizes as small as 0.01 lots, which is 1000 of the particular currency pair. This is called a micro lot. Some trading platforms denote this as a 1K lot size. Others refer to a 1K lot as one unit.
For a really small investor, a 1K lot sounds like a really big trade size. After all, how would someone with a $500 account be able to open a 1000 dollar position?
Well, the great thing about trading forex is that retail brokers allow you to trade with leverage. The leverage offered by retail forex brokers generally vary between 1:100 and 1:1000.
Some brokers offer ridiculously high leverage of 1:2000, 1:3000, and even 1:5000. Of course, some countries regulate the amount of leverage you can use as a retail forex trader, like the United States which allows a maximum leverage of 1:50.
Let’s use 1:100 leverage as an example. If you have a $500 account and you want to open a 1K trade on the USD/CHF, you will need $10 to open the position.
Without using leverage, this would not be possible because a 1K lot of the USD/CHF is worth $1000.
Pip Value of the USD/CHF
To establish the pip value of the USD/CHF, we first need to consider what a pip is. If the USD/CHF is trading at 0.96500 and the exchange rate moves to 0.96510, it has moved one pip higher. The fourth digit after the decimal point is called a pip.
To calculate the pip value of the USD/CHF, we’ll use a 1K lot as an example. On the USD/CHF, one pip is 0.0001, or 1/10,000 of one Swiss franc. Multiply this by 1000 and you get 0.1 Swiss francs.
At the current exchange rate, one U.S. dollar is valued at 0.965 Swiss francs. To get the pip value in U.S. dollar, we calculate the dollar value of 0.10 Swiss francs at the relevant USD/CHF exchange rate (0.965 Swiss francs per one dollar).
So, 0.10 Swiss francs divided by 0.96500 = $0.1036269. Let’s just round it to $0.10. This is the pip value of a micro lot (1k lot) of the USD/CHF at the current exchange rate.
It’s important to know that the USD/CHF pip value (in U.S. dollar) changes with the exchange rate. For example, when the USD/CHF exchange rate rises, the pip value in U.S. dollar decreases due to the devaluation of the Swiss franc. Remember, the pip value for a 1K lot is always 0.10 francs. This means that when the franc is worth less, the pip value in other currencies will also be less.
Let’s say the franc depreciates against the U.S. dollar until the USD/CHF trades at 1.93000. The pip value would then be half of what it is at the current exchange rate of 0.96500.
To calculate it, we’d have to divide 0.10 francs by 1.93 (the exchange rate) which would give us a pip value of $0.0518134.
Profit and Loss Calculation
Here at FXLeaders, we go the extra mile to offer traders the best forex signals possible. In 2016 alone, we bagged a phenomenal 4,907 pips! A certain amount of these gains came from our USD/CHF signals.
Let’s calculate how much money you’d make if you traded a USD/CHF signal with 12 micro lots, bought at 0.9650, and hit a profit target of 276 pips at 0.99260.
12 micro lots is 12,000 of the USD/CHF currency pair. If we multiply 276 pips by the current pip value of $0.1036269, we will definitely get the wrong answer: 12 micro lots X 276 pips X $0.1036269 = $343.21.
But if we take the target price of 0.99260 and subtract the entry price of 0.9650, we get 0.0276 Swiss francs. If we multiply this by 12000 (12 micro lots of the pair) we get a profit of 331.20 francs.
Remember, the new exchange rate is 0.99260, which means the Swiss franc has lost some of its value. If we convert our profit of 331.20 francs to dollars, we’ll only get $333.67, and not $343.21. So, the correct amount is $333.67.
Because of the dynamic pip value of this pair, we can’t use the current pip value at any point in time to accurately project take profit or stop loss values for trades.
We can use this as an estimate, though, especially if the target is relatively small. But when we need to make exact calculations, we need to calculate the profit or loss in Swiss franc and convert this amount to U.S. dollars at the new USD/CHF exchange rate, like in the example above.
And remember, just like the pip value (in U.S. dollar) decreases as the pair moves higher, so does the pip value increase when the pair moves lower. The pip value in Swiss franc always remains the same because the quote currency is Swiss franc.
Instruments Correlated to the USD/CHF
Of the major currency pairs, the USD/JPY and the EUR/USD bear the highest correlation to the USD/CHF.
The USD/JPY has a one-year correlation of 0.83 to the USD/CHF, and the EUR/USD has an inverse one-year correlation to the USD/CHF of -0.96.
Some of the less prominent currency pairs that are highly correlated to the USD/CHF, include: EUR/HKD (-0.96), CHF/HKD (-1.00), HKD/JPY (0.83), USD/CZK (0.93), USD/DKK (0.96), USD/HUF (0.91), USD/SEK (0.88), and USD/SGD (0.89).
Although gold is not a currency by definition, it is often viewed and traded in the same way as currencies, especially in the modern electronic trading environment.
The Swiss franc is highly correlated to gold, and hence, the USD/CHF and XAU/USD (gold/United States dollar) have a remarkable one-year inverse correlation of -0.82). When the USD/CHF pair moves higher, gold tends to move lower.
For an interesting guide on how to trade gold, simply follow the following link: Gold Signals – A Beginner’s Guide, Part 1.
Here are links to similar guides on how to trade the EUR/USD and the USD/JPY:
Both the Swiss franc and gold are considered to be safe-haven assets.
It’s important to note, however, that the Swiss franc’s correlation to gold doesn’t remain constant and can change substantially.
Correlated Equity Indices
At 0.69, the Japanese Nikkei 225 has the highest 1-year correlation to the USD/CHF at the moment (of the major global equity indices).
Major Economic Events that Impact the USD/CHF
Of the many economic events that influence the USD/CHF, there are a few that can cause substantial volatility in this exchange rate.
1. Monetary Policy – Actions and Comments by Central Banks
Monetary policy is certainly one of the most important drivers of the USD/CHF. The Federal Reserve of the United States and the Swiss National Bank are in charge of their countries’ monetary policies.
When the FED and the SNB comment or take action in regards to interest rates, quantitative easing, inflation, and economic growth forecasts, it often causes violent moves in the USD/CHF exchange rate.
The SNB caused a major flash crash in the USD/CHF exchange rate (and other CHF pairs) on 15 January, 2015.
Before this, the SNB intervened aggressively in the EUR/CHF exchange rate and pinned the Swiss franc to the Euro in an effort to prevent the Swiss franc from strengthening against the Euro.
On the date mentioned above, the SNB announced that it would no longer maintain the ‘floor’ or the ‘peg’ in the EUR/CHF exchange rate.
This caused a massive selloff in the EUR/CHF which affected all Swiss franc currency pairs. The USD/CHF was no exception and dropped more than 2000 pips in a couple of minutes.
2. Economic Indicators
Economic indicators are used to analyze how well a country’s economy is performing, and to predict future economic growth.
There are three main categories of economic indicators, namely, leading, lagging, and coincident indicators.
Indicators like GDP numbers (gross domestic product), CPI numbers (consumer price index), interest rate decisions, the unemployment rate, wage growth, industrial production, and retail sales numbers, are regularly released in both the U.S. and Switzerland. Although these aren’t the only important economic indicators, they have great potential to move the USD/CHF, especially interest rate decisions, GDP and CPI numbers, and labor market data (like the U.S. nonfarm payrolls numbers, unemployment rate, etc.).
Although economic news out of Switzerland can move the USD/CHF exchange rate considerably, the most market-moving economic news releases typically emanate from the United States.
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