FX MONETARY POLICies
Te shocking statement of the SNB. The
risks : losses,
inflation, international investments, Swiss taxpayers burden
“There is always an eas y so lution to ev e ry human problem: neat, pl ausib le and wrong ”
Henry Louis Mencken
SNB hiGh riSk STrATEGY: another step towards global currency war?
O
n Tuesday September 6th 2011, markets were already experiencing a quite high
volatility - as it has been the norm since the end of July with all the fears regarding double-dip recession fears, US political impasse (and downgrade) and obviously the complicated situation of the EuroZone. But around 10am CET a quite unprecedented event, as far as modern history of foreign exchange is concerned, was about to happen, suddenly, abruptly. In fourteen minutes EUR/CHF,
which was trading around 1.1265 (already
significantly higher than
previous day close around 1.1100) skyrocketed to almost 1.2200 to never look back below 1.2000. A move of over 8% in less than a quarter of an hour. Definitely an unprecedented move for major currencies. It was generated from a communication of the Swiss National Bank. Following is the ‘shocking statement’.
Te current massive overvaluation of the Swiss fanc poses an acute threat to
the Swiss economy and carries the risk of a deflationary development. Te Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss fanc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. Te SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. Even at a rate of CHF 1.20 per euro, the Swiss fanc is still high and should continue to weaken over time. If the economic
outlook and deflationary
risks so require, the SNB will take further measures.
Chart 1. EUR/CHF 8% move in 14 minutes on September 6th .
Such an unexpected ‘verbal intervention’, coupled with some real buying on the way up (estimated in 5 billion euro) and some more later in the day to avoid a slip back below 1.20 (few more billion bought) has done the trick: a somehow weaker (than the last few weeks) and stable Swiss franc.
22 FX TRADER MAGAZINE October - December 2011
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