The shocker in the forex world came today with the announcement from the Swiss National Bank that it "would not tolerate" a Euro/Swiss Franc exchange rate below 1.20. The sharp reaction in the Swiss Franc -- it plunged approximately 8% in one hour -- coupled with the emphatic statement from the SNB make this one of the most impactful central bank interventions ever by the central bank of a major currency.
There are a few implications we can draw from this event:
- The SNB is pretty adamant regarding its intentions. I previously thought it would not be as coercive and would not be able to realistically prevent franc strengthening. I am still not so sure the SNB isn't just raising the stakes in this bluff, but I'm not interested in challenging it. This latest intervention is, quite literally, raising the stakes.
- Still, though, monetary policy of central banks around the world remains largely inflationary, and even IMF head Christine Lagarde has called for more stimulus on a global basis -- the result of which will be an expansion in the global money supply.
- Further expansion of the global money supply means there will be more capital looking for a place to go -- and probably will look for safe haven assets, as the ongoing sovereign debt crisis has reached a point where real, sustainable growth, and a corresponding secular bull market in equities, cannot occur until the debt problem is resolved. The strong appreciation in the Franc is symptomatic of the market's desire for safe haven assets; now that the SNB is serious about closing this door, the most viable options are gold, silver, the Singapore Dollar, and the Canadian Dollar. However, the US economy is still the financial headquarters of the world due to the status of US dollars and US Treasury bonds, so while those assets remain deeply flawed from a fundamental perspective, the trend remains with them -- or at the very least, not against them.