Swiss National Bank Intervenes In Unprecedented Move: What Now?

Includes: FXE, FXF, FXY, UDN, UUP
by: Chris Capre

Anyone waking up and looking at the charts without seeing the news first might have had a surprised look on their faces when seeing the EURCHF price jump over 9% and 1000pips in a matter of three hours.

Today, the SNB intervened in an unprecedented, sudden and aggressive move by setting a minimum rate for the franc vs. the euro in what they stated was to “achieve a substantial and sustained weakening” of the franc which has been appreciating against the entire basket of G8 currencies.

Concerns of a possible imploding Europe with CDS spreads widening and bond yields tumbling vis-à-vis the German 10-year bond below 2% for first time in history has caused a mass exodus into gold, silver and the safe haven currencies such as the CHF and JPY.

The real questions that come into play now are:

  1. Can the SNB maintain this policy and price stability long term?
  2. Has the SNB tipped its hand that it is running out of options?
  3. Who benefits from this short/long term?

We will briefly explore each of these options.

Can the SNB maintain this policy and price stability long term and has the SNB tipped its hand?

History would argue both "yes" and "no." Generally, central banks have been unsuccessful in fighting currency appreciations such as the CHF has been experiencing over the last few years. They have already tried to intervene several times and failed to stem the appreciation of the CHF against pretty much anything. People in Europe would rather have their money based in CHF than euros for now considering how Europe is trying to fund its debt with debt and what we think is creating policies that will absolutely undermine the entire regions stability, possibly imploding the EMU.

Another case for unsuccessful interventions has been Japan and its failed attempts to stop the appreciation of the JPY vs. the basket. The SNB had to be aggressive but do they have the Forrest-like endurance for a long run against the current turmoil and risk environment?

One has to look back to 1978 when the SNB had fought off a massive appreciation of the franc (vs. DEM) before with an exchange rate target. The difference between then and now is they did this only by abandoning their inflation targets. We feel they will have to do this again if they are to be successful.

Short term, keeping it around these levels or above 1.2000 is easy, but whether it will in the coming weeks or long term is highly questionable. By announcing their base levels, they may have tipped their hat that they are running out of money-market options and are resorting to drastic measures to calm the waters.

The real question is will they abandon their targeted inflation levels? In 1978, they were able to push inflation from 1-5% within a year. It was only after this that they suspended their peg. Long term these issues will play themselves out, but short term, expect the CHF to remain strong against the basket of currencies.

Another question remains has to do with the uncertainties both regionally and globally and who benefits from this short-long term?

Short term this gives the country more stability as their companies can improve their exports to the local region while the eurozone gets relief from being punished for completely fumbling the issues with the fab five (Greece, Italy, Spain, Portugal and Ireland).

Long term we really have to see how the SNB will deal with the inflation issues.

We also have to consider the entire global economy is hanging under the Sword of Damocles and one gets the feeling it will only take a pin to start a rock slide here. Should Bank of America (NYSE:BAC) fail (and we think it will), this will destroy confidence in the major U.S. banks also sparking issues of another bailout and who flips the bill. This could easily cause a panic in the U.S. markets and we could see a massive depreciation in a matter of weeks.

Europe still hasn’t resolved the Greek tragedy with German and Finland demanding difficult terms and if any of the dominoes go here, the region could fall into panic and spread globally as well.

China is showing signs of cooling and emerging countries such as Brazil (which just reduced its rate by 50bp) are also showing massive internal problems.

Bottom line is people are spooked, causing a flight to precious metals and safe-haven currencies with the leader of the pack being the CHF. Any further degradation in these environments suggests people will pile into these options and this could really hinder the SNB’s goal to keep the base level in place. Short term, we like being long CHF vs. the EUR with tight stops below the base target level but this recommendation has a time signal degradation so be careful. Also plays on the CHF vs. the GBP and USD as the Franc will likely find short term bids but tread carefully as the dust settles over the next few days.

Chris Capre is the Founder of 2ndSkiesForex.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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