The SNB announced this morning that it intends to keep the EUR/CHF rate at a minimum of 1.20 - this is the 'floor' which it will be defending. This direct intervention in the currency market caused the swiss franc to understandably sell off sharply across the board in response.
With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.
Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.
The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.
Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.
Richard Driver
Analyst – Caxton FX
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