What Is the EUR/CHF (Euro/Swiss Franc) Relatio🎀nship?

The correlation between the euro and the Swiss franc 澳洲幸运5官方开奖结果体彩网:currency pairs is too strong to be ignored by traders on the forex market. The 澳洲幸运5官方开奖结果体彩网:correlation between the two currency pairs EUR/USD (euro/U.S. dollar) and USD/CHF (U.S. dollar/Swiss franc) is negative 98.4% as of November 2024.

This represents an inverse relationship indicating that 🍌the USD/CHF (U.S. dollar/Swiss franc) mostly sells off when the E♏UR/USD (euro/U.S. dollar) rallies and vice versa.

How the EUR/CHF (Euro/Swiไss Franc) Relationship♉ Works

The EUR/CHF currency is driven by the pair of currency pairs USD/CHF and EUR/USD. A 98.4% correlation is close to perfect for two separate and distinct financial instruments. 澳洲幸运5官方开奖结果体彩网:Arbitraging the two currencies in an attempt to capture the 澳洲幸运5官方开奖结果体彩网:interest rate differential doesn't always work, however.

The U.S. dollar is the dominant currency. It's involved in nearly 90% of all currency transactions. The U.S. economy is also the largest in the world so its strength or weakness impacts many other nations. A strong relationship between the EUR/USD and USD/CHF is partially due to the common U.S. dollar factor among the two currency pairs but the bilateral EUR/CHF relationship is stronger due to the closer ties between the eurozone and Switzerland.

Switzerland is surrounded by other members of the eurozone and has close political and economic ties with its larger neighbors. These ties and relationships began with the 澳洲幸运5官方开奖结果体彩网:free trade agreement established in 1972. This was followed by more than 100 bilateral agreements that have allowed the free flow of Swiss citizens into the workforce of the 澳洲幸运5官方开奖结果体彩网:European Union (EU) and the gradual opening of the Swiss labor market to citizens of the EU.

Special Considerations 

Figure 1 shows the near-mirror images of these two currency pairs. It demonstrates that a position of long on E𓂃UR/USD and long on USD/CHF represents two closely offsetting positions or EUR/CHF. 

Taking a long position on one and a short position on the other is doubling up on the same position although it may seem like two separate trades. This is significant for proper risk management because losses can easily compound if somethi♏ng goe♏s wrong with a short position on one currency pair and a long position on another.

Trading on an intraday basis is less risky because the correlation is weaker over a shorter period. The EUR/USD often marginally leads the price in USD/CHF because it tends to be the more liquid currency pair. 澳洲幸运5官方开奖结果体彩网:Liquidity in USD/CHF can also abate in the second half of the U.S. session when European traders🉐 exit the market. Some moves can be exacerbating.

Some might propose neutralizing the U.S. dollar exposure to properly hedge. We run the same scenario and hedge the USD/CHF by the dollar equivalent amount for 🅘a꧋ euro each month. We do this by multiplying the USD/CHF return by the EUR/USD rate at the beginning of each month. We hedge by buying US$1.14 against the Swiss franc if one euro is equal to US$1.14 at the beginning of the month.

Criticism 🌳of the EUR/CHF (Euro/Swiss Franc) Relationship

The relationship between the EUR/USD and USD/CHF 澳洲幸运5官方开奖结果体彩网:decouples when there are divergent political or 澳洲幸运5官方开奖结果体彩网:monetary policies. The EUR/USD might slide further in value than the USD/CHF rallies if elections or other circumstances bring uncertainty in Europe but not in Switzerland. The EUR/USD might appreciate more in value than⭕ the USD/CHF slides if the eurozone raises interest rates aggressively and Switzerland does not.﷽

Interest rate arbitrage in the FX market using these two currency pairs doesn't work because the ranges of the two currencies can vary more or less than the point difference. The ratio of the range is calculated by dividing the USD/CHF range by the EUR/USD range.

The Bottom Line

The correlation between the eur♏o and the U.S. dollar and the Swiss franc and the U.S. dollar is critical to forex traders. These are two♓ strong relationships and their interaction can be an important component of successful trading. It can easily be affected by national monetary and political policies.

Consider working with an expert before you invest if you’re not sure you understand this correlation.

Disclosure: Investopedia does not provide investment advice; investors should consider their risk tolerance and investment objectives before making investment decisions.