Fundamental Analysis
FX
intervention as in 2009. Still, it’s a brave tactician who would take on the SNB given the reaction to this month’s intervention and the cross is still trading way below perceived and popular estimates of fair value, which seem to range between 1.30 and 1.45.
EUR/CHF
Unofficial leaks are now suggesting the new floor will be raised again very soon, perhaps to 1.25.
hammered out by the IMF team and other ‘Troika’ partners of the EU and the ECB; a stunning 87% of French respondents to an IFOP poll published on September 18th believe that the latest bailout plan will amount to the money simply being lost, as ‘Greece will never be able to reimburse it.’ My French is admittedly
a bit rusty
so I am unsure whether “quel domage” or “quel dommage” is most apt, perhaps somewhat ironically both might apply.
The as yet unknown ramifications of the continuous political battles and ‘horse-trading’ by the ‘Troika’ to resolve EFSF issues are also reasons why the FX markets are getting short Euros in earnest, although perhaps not so much against the Swiss Franc these days after some hefty intervention by
the SNB saw the EUR/CHF cross rise from virtual parity to the Euro by around 20 percent to 1.20 in a matter of days, with 9 percent of that move from 1.10 to 1.20 occurring in one day on September 6th. At this point is where the line in the sand has now been drawn although with such raging success further emboldening the authorities, unofficial leaks are now suggesting the new floor will be raised again very soon, perhaps to 1.25.
Shortly after its EUR/CHF intervention the SNB was reported to have made clear its intent to diversify reserves further still by offering
to buy any amounts of
foreign denominated currency vs. the Franc, quite a strong statement and one that may yet come back to haunt them in future, unless of course the SNB backs away from the
The following is certainly not a trade recommendation, more an observation, in that although the Central Banks usually win the intervention battles that occur from time to time, the ultimate victors of such wars are not always entirely clear. The Plaza accord of 1985 for example was probably a job done too well by the U.S., Japan, U.K., West Germany and France, given the subsequent collapse in the trade-weighted Dollar index by around 40 percent or so since then, with particular emphasis on the USD/JPY rate which has fallen by around 70% of its value from 243 then to 76 now.
Perhaps the BoJ will be inspired to take a leaf from the SNB’s handbook of intervention techniques as a possible Q4 FX market surprise?
Regardless, the point is that over
time it’s market fundamentals and not central banks that truly dictate free-floating currency values and as much as we did point out last issue that the market was running a clear risk of encountering the SNB due to the severe overvaluation of the Franc, it really would be absolutely incredible if markets
FX TRADER MAGAZINE October - December 2011 11
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