Another Suspected Swiss Intervention

Includes: ERO, EU, EZU, FXE, FXF, IEV, VGK
by: Ophir Chador

Currency traders received a bit of a jolt during Thursday’s trading session, following a suspected intervention by the Swiss National Bank in the currencies market. The SNB is believed to have intervened in the marketplace on multiple occasions since its last confirmed activity in March, 2009.

The SNB’s intervention efforts have primarily targeted the Swiss franc’s appreciation relative to the euro. The bank’s efforts are designed to weaken the franc in order to make the country’s goods and services more attractive to foreign buyers; in other words, as a means to shore up its export industry.

But what did this latest SNB intervention actually accomplish?

Relative to past efforts, this latest intervention had little effect on the market. In the immediate aftermath of the Thursday intervention, the EUR/CHF traded slightly above the 1.44 handle for all of three minutes – slightly less, actually. By the session’s close, the pair would settle at 1.4327, a level that had not been seen for all of 2 days. The end result was a 0.6 percent “spike” for the EUR/CHF over the previous close, rendering the SNB intervention a wasted effort.

Why the muted response to the SNB intervention?

A number of factors may have contributed to the market shrugging off this latest effort by the SNB. For one, there are systemic issues within the eurozone with which the SNB cannot compete. The SNB strategy of buying euros in bulk will do nothing to resolve these issues, nor will it alter the appeal of Swiss franc-denominated assets relative to assets denominated in euros.

Secondly, while the SNB’s focus has been squarely on the franc in recent months, domestic realities will likely command more of their attention going forward. Specifically, the Swiss economic recovery has been both speedy and robust, which adds to the likelihood of a rate hike in the near future. And from our Forex 101 class we know the following equation by heart:

Higher Interest Rates = Higher Currency Rates

For public consumption, the SNB has been quite vocal about its stance on an appreciating currency. Meanwhile, in a much softer voice, the SNB has been preparing markets for the impending conclusion of the loose monetary policy that currently prevails.

In a recent statement, SNB board member, Jean-Pierre Danthine, warned that investors need to prepare for a “return to higher rates, with foreign exchange rates being set by market forces.”

Perhaps what the board member meant to say was, The SNB will take one more shot at weakening the franc, but then it’s up to the markets.

That, of course, is a subjective interpretation – but does it not hold merit? Is the SNB really in the process of scaling up its war against the currency market?

In all likelihood, the SNB wanted to sneak in one last intervention effort before the Treasury Department issues its semiannual report on international currency practices. While many assume – or perhaps hope – that the April 15 report will be hypercritical of the Chinese, the SNB’s intervention efforts over the past year are just as likely to draw criticism. In fact, any mention of the Chinese without similar mention of the Swiss would be viewed as highly prejudicial, giving Chinese lawmakers sufficient ammo to tell the Treasury to buzz off.

How, then, should we trade this latest SNB intervention?

It’s simple: buy the Swiss franc against the euro on any weakness!

History tells us that the immediate effects of SNB intervention are not the same as its long-term effects. While SNB activity causes the Swiss franc to fall in an immediate sense, the strength that preceded the SNB activity inevitably resumes.

Case and point: On March 12, 2009, the SNB intervened in the currencies market, propelling the EUR/CHF from its session lows of 1.4750 to a session high of 1.5340. The EUR/CHF would climb even higher in the two days that followed, reaching an “intervention high” of 1.5450 on March 14. To date, the 1.54 handle has never again been crossed, nor has an SNB intervention been followed by two consecutive losing days for the franc against the euro.

As of 5:00 p.m. in New York, Friday, the EUR/CHF closed the trading week just below 1.4325 – next stop, 1.3500.

(All SNB Interventions mentioned, or alluded to, in the preceding text are widely suspected, but not confirmed, as the SNB does not comment on such activities. One exception is the March 12, 2009, intervention, which the SNB did, in fact, confirm.)

Disclosure: Author is Short EUR/CHF