On Tuesday night the Swiss National Bank took the extraordinary step of announcing to the market that they would “no longer tolerate” an exchange rate of less than 1.20 Francs to the Euro.
The rapid rise of the Swiss Franc, (which has appreciated 75% in value against the US Dollar since June, 2010) has been causing pain for Swiss businesses and the Swiss economy, so it was no surprise that the announcement was welcomed by Swiss companies.
The rise in the Swiss Franc is shown in Chart 1 (ProfitSource code FXEUSF) below. The value of one Euro has plummeted from 1.68 Francs in 2007 to 1.01 Francs in August, 2011.
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Swiss National Bank Chairman, Philipp Hildebrand declared he would use “unlimited quantities of cash” to defend a price level of 1.20 Swiss Francs to the Euro. This announcement led to a massive decline in the value of the Swiss Franc and a 1,000-point range day on the Euro/Swiss Franc chart, as shown in Chart 2 below.
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This is all well and good from the Swiss point of view and no doubt they have the resources to back up this statement, for the short-term at least. But with more than four trillion dollars passing through the FX markets every day, if the markets (of which speculators, banks, financial institutions and other central banks etc are all a part) decide the Swiss Franc really is a ‘safe haven’ and continue to buy into it, we will effectively have a war between the Swiss National Bank and the rest of the markets.
I can’t see this ending well for the Swiss National Bank. During the recent Global Financial Crisis we saw many instances of intervention in the markets for little or no result. Generally speaking, markets react positively for a few days following such interventions and then resume their original trend.
The weeks and months ahead should prove very interesting in the currency markets with good trading ranges and plenty of profits for those with the skills to trade them.
A reminder for those students who are attending my Australian Dollar forecasting webinar on September 24 - the Bonus Training videos have commenced and are available now through the MyPage section of the Safety in the Market website. If you haven’t yet registered, there is still time – just email firstname.lastname@example.org