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Why is the Swiss Franc Considered a Safe Haven Currency for Investors?

Feb 20, 2019 by

Until recently, the Japanese yen was considered to be the leading safe haven currency in the forex market. There was good reason for this too; with the yen having appreciated by more than 20% in the wake of the financial crisis of 2008 and showcased incredible durability over time.

In recent times, however, risk-averse investors have been more inclined to opt for the Swiss Franc as their safe haven currency of choice. What many people don’t know is that the Swiss Franc has been established as a viable safe haven since 1934, when the presiding government established a law that protected the privacy of bank account holders and saw millions of dollars funnelled into the nation’s financial system.

But why does this currency remain so popular among risk-averse investors today? Let’s take a look.

A Stable Country and Financial System

Aside from its reputation as a global banking hub, Switzerland is also a key player in the lucrative financial services market.

These sectors underpin a stable economy with low volatility, while Switzerland also boasts virtually no unemployment and relatively high wages. As a result the standard of living in Switzerland is exceptionally high, especially in relation to other nations on the continent of Europe.

Importantly, Switzerland is also one of the few countries in the world to boast positive trade balance figures, which means that more country pours into the country than flows out of it.

As nation, Switzerland also boasts incredibly low levels of borrowing, with the nation’s debt-to-GDP ratio estimated at just 29.5% in December 2017.

This contrasts sharply with developed economies such as Japan (222.2%), Italy 132.5% and even the UK (89.3%), whose economies are still struggling with the debt mountains created by the aforementioned financial crisis 10 years ago.

Currency and the Macroeconomy

Ultimately, these macroeconomic factors offer an insight into how an aggregate economy behaves, and there’s no doubt that Switzerland’s has performed consistently well for a considerable period of time.

These factors also have a direct impact on currency values, which goes a long way to explaining the relative strength of the Swiss Franc and its appeal among risk-averse investors.

Of course, some will note that the currency endured a so-called “flash crash” recently, when it suddenly lost value and triggered a rapid sell-off among investors.

However, the precise trigger for this crash remains a mystery, while the currency has since rebounded to once again offer value as a safe-haven currency. At the same time, Oanda have revealed that the pound to Swiss Franc exchange rate fell at the beginning of February after a brief surge, with the latter once again performing well against its fellow major currencies.

Ultimately, the Swiss Franc’s reputation as safe-haven currency is longstanding and well-deserved, while there’s no sign of this trend abating any time soon. In fact, its strength is only being amplified by the struggles of the pound and the Euro, which continue to struggle against the backdrop of Brexit.

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