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The Swiss Central Bank pegged the price of the franc to the euro at 1.2000 on September 6th, 2011. The peg was widely criticized at the time, and many claimed the bank could not hold the level for any length of time.

The commitment to the peg was further questioned when the primary architect of the peg was forced to resign after a currency trading scandal involving his wife. Philip Hildebrand, the head of the SNB, was forced to resign when it turned out his wife made a currency trade which profited from a massive Central Bank intervention in the currency markets.

Still, here we are 9 months later and the peg has held. The EURCHF was trading 1.2010 as I wrote this, and has only fallen below 1.2000 for a few ticks on one day. It appears some junior staffer must have gone out for coffee that day.

The reason for the huge overvaluation is the capital flows out of the euro currency into the franc. Europeans are worried about the value of the euro going down - or even the risk of the euro breaking up. This caused people to switch from euros into francs, USD, and Japanese yen.

But Switzerland is a small country, with a much smaller economy. So even moderate capital flows had a huge impact on its currency. This caused a historic rally in the franc over the early part of 2011.

Before the interventions in September 2011, the Swiss franc was the most overvalued currency in the world, and certainly the most overvalued major currency in the world. According to the Economist's "Big Mac" index, the Swiss franc was overvalued by 100% or more at the peak value in September 2011.

Since the franc is locked in value relative to the euro, this means the franc and the euro move in the same manner relative to the U.S. dollar. As the EURUSD fluctuates, the USDCHF will fluctuate in the same manner. This means the EURUSD (NYSEARCA:FXE) and the USDCHF (NYSEARCA:FXF) will move in a very similar fashion.

To determine how much longer the EURCHF will be close to the 1.2000 peg level, we must keep in mind the reasons for the capital flows. We must remember the reason for the strength of the franc was the capital flows out of the euro, and not any real fundamental strength of the CHF.

So the level of the euro is not as important as the belief the euro will survive. What will trigger a fall in the value of the Swiss franc is return of capital to Europe; as confidence grows the euro will survive and prosper.

This means something interesting. As the euro falls in value, this is a good thing for European economies. It makes them more competitive in the world. In short, a weaker euro is part of the cure for the problems in Europe.

This means once the EURUSD gets below the 1.2300 level, the reason for capital to stay in Switzerland gets weaker, and repatriation of assets becomes attractive to those wealthy individuals holding their assets in Swiss Francs. This could happen as soon as a few weeks from today.

The trade of the year is going to be timing the beginning of the huge fall in the Swiss franc, and I believe we've already seen the breakout which portends the massive downward move for the Swiss franc.

Source: Trade Of The Year: Short Swiss Franc