DEFINITION of CHF (Swiss Franc)
CHF is the abbreviation for the Swiss franc, the official legal tender of Switzerland and Liechtenstein. CHF stands for Confoederatio Helvetica Franc, and Confoederatio Helvetica is the Latin name for the Swiss Confederation. The Swiss franc is often called the swissie by currency market traders, and it is the sixth most traded currency in the world, as of 2016.
BREAKING DOWN CHF (Swiss Franc)
The currency market, also known as the foreign exchange market or forex, is the largest financial market in the world, with a daily average volume of more than U.S. $5 trillion. The Swiss franc comprises a large portion of this trade. The Swiss franc is a safe haven currency, with many governments and other entities holding the currency as a buffer against instability in various types of markets and investments.
The currency's stability is the result of several factors, including Switzerland's history of political stability, its strong rule of law, its neutral stance with regard to foreign affairs, and its Western approach to business affairs. In addition, Switzerland's government and the Swiss National Bank are traditionally non-interventionist. The Swiss franc is not a reserve currency, however. Foreign trade involving Switzerland is typically settled in euros or U.S. dollars, not in Swiss franc.
The Swiss Franc Peg
The demand for the Swiss franc as a safe haven substantially increases its value in the global foreign exchange markets. The demand for the currency as a safe haven soared in the years following the 2008 financial crisis. By 2011, the Swiss National Bank (SNB) had amassed about a half-trillion dollars in foreign currencies, equal to about 70% of Switzerland's GDP. Although the high value of the currency made foreign goods cheap in Switzerland, it hurts domestic exporters and the Swiss tourism industry, as it makes the purchase of Swiss manufactured goods and services more expensive.
With Switzerland's economy so heavily dependent on exports and tourism, the flight to the safety of the Swiss franc by global investors was hurting the economy. In September, 2011 the Swiss National Bank broke with tradition when it unfloated the swissie and pegged it to the euro, with the fix set at 1.2000 Swiss francs per euro. It defended the peg with open market sales of the swissie to maintain the peg on the forex market. In January, 2015, the SNB suddenly dropped the peg and refloated the currency, wreaking havoc on stock and forex markets. Swiss stocks tumbled dramatically, while the Swiss franc soared about 30% relative to the euro within minutes. Some investors and firms were wiped out.
Economists and investors strongly criticized the SNB's actions for dropping the peg without warning and for implementing it in the first place. Its actions were also unpopular in Switzerland. Due to widespread international criticism, as well as growing domestic support for initiatives to reign in the SNB, the bank assured the public that it was returning to its traditional stance of non-interventionism.