The Swiss franc (CHF) is the official legal currency of Switzerland and Liechtenstein. It is also known as the swissie among currency market traders, and it is the seventh most traded currency in the world.
What does the abbreviation CHF mean?
The abbreviation for the Swiss franc is CHF which stands for Confoederatio Helvetica franc. Confoederatio Helvetica means Swiss Confederation in Latin. It is the only franc that remains in circulation in Europe. The other nations which used to denominate their currencies in francs have now adopted the euro.
Why is the CHF a popular currency?
The CHF is one of the strongest and most stable currencies in the world as a result of the Swiss central bank’s zero inflation and Switzerland’s political independence. The CHF, along with the US dollar and the Japanese yen, are considered safe haven currencies because they have strong liquidity, relatively low inflation, and stable political systems. This is also why the Swiss franc is attractive to investors. Switzerland’s strong financial system and economic stability as well as its transparent reporting system instil confidence and trust to prospective investors.
Trading the CHF in the foreign exchange market
The currency market, also known as the foreign exchange market, is the largest financial market in the world, with a daily average volume of $7.5 trillion (October 2022). The Swiss franc makes up a large portion of this trade. As a safe haven currency, the Swiss franc has remained popular among investors and big financial institutions, and many governments hold the currency as a safeguard against uncertainty and volatility in various markets and investments. Since the Swiss franc is not a reserve currency, foreign trade with Switzerland is settled in euros or US dollars.
Factors that have contributed to the CHF’s stability
The currency’s stability depends on many factors, including Switzerland’s political stability, low inflation, strong rule of law, neutral position on foreign affairs, and its western approach to business. Since demand for the CHF as a safe haven is high, this means that the currency’s value in the foreign exchange market is high. So, when there was global instability following the 2008 financial crisis, many investors turned to the CHF, pushing its value higher. By 2021, the SNB had amassed $1.02 trillion in foreign currencies.
Imports are cheap, but exports are expensive
The high value of the CHF may make foreign goods cheaper in Switzerland, but Swiss exporters and the Swiss tourism industry struggle, as buying Swiss goods and services becomes more expensive. This is particularly a big issue, as Switzerland relies on exports and tourism.
Swiss franc gets pegged to the euro
Between 2011 and 2015, the CHF was pegged to the euro. Because Switzerland was the most expensive place to do business in Europe, exporters and service providers faced various challenges and found it extremely difficult to make profits. By pegging the Swiss franc to the euro, at a time when the Eurozone was just exiting a crisis and the euro was weak, was seen as a great way to boost profitability for Swiss exporters and service providers. However, this didn’t last for long.
Scrapping the currency peg
On the 15th of January 2015, Switzerland announced that it would scrap its currency peg of 1.20 to the euro. The news led the Swiss franc to rise sharply by 20%. The increased value of the Swiss franc took markets by surprise but also negatively impacted businesses and individuals. Swiss stocks fell considerably, while firms were wiped out. Many people in Switzerland, Poland, and Croatia who had their mortgages in Swiss francs were also affected dramatically. Economists and investors criticised the SNB’s decision to drop the peg without providing any warnings.
The reason behind the Swiss National Bank’s move is unclear but there are three theories. The first one is that Switzerland didn’t see the Eurozone as sustainable. The second was that Switzerland was aiming for franc parity with the euro, and the last theory is that rich Americans who had money in Swiss bank accounts were unhappy about their investments which took a hit due to a weak euro vs. the US dollar.
The Swiss franc remains one of the world’s safest assets and one of the most frequently traded currencies on the foreign exchange market. For many investors, the safe haven currency has been especially appealing during periods of political uncertainty and debt crises in the European Union or abroad, and have moved some of their wealth into the Swiss currency. If you are investing in the CHF, it is always important to do your own research or seek expert insights from your currency broker.