MONETARY POLICies
In this article we will try to analyze how we got to this point; which are the risks SNB will be facing for such a bold move; the impact on the FX world and other asset classes; and finally the risk of this being another step getting nearer to a global currency war.
TWO YEARS OF EFFORTS TRYING TO CONTAIN THE FRANC BULL RUN
On March 12th 2009, few days aſter
EUR/CHF hit an all-time low at 1.4576, SNB intervened in the currency markets for the first time since 1995. Surprise, the amount (estimated at around 4 billion euros bought), was able
to drive the market from
1.4800 to 1.5400. At the time it was not mainly annoyance for the franc strength (how would they like a 1.45 level now!) driving the intervention. In fact it was presented and explained as a monetary tool. In the middle of the global recession caused from the credit crisis, the SNB was embarking in the same unconventional monetary stimulus now widely known as QE – Quantitative Easing. Unfortunately the bond market in Switzerland
–
government and eventually corporate – was too small to achieve a decent liquidity injection without distorting prices too much. Te only alternative was to use the far bigger FX market, selling CHF, to get the same QE result. Tose days, the buying pressure on the CHF was more limited than recently experienced, mostly due to general risk-aversion (which was destined to subside from H2 2009) and a structural surplus of the current account. Till
FX
SNB draws a line in the sand at 1.20. A bold move. A move with many risks. maybe a desperate move.
mid December 2009 it was then fairly simple for them to keep the currency in a 1.5000-1.5400 range with limited intervention activity. Towards 2009 year end and in the first months of 2010 a new more specific and lethal problem for the EUR/CHF exchange rate was about to surface: the EuroZone crisis. Swiss franc was not
anymore just a typical ‘risk-aversion’ currency due to appreciate in tough times for the positive external balances and the broad deleveraging from carry trades financed in low-yielding currencies (CHF and JPY being the prominent examples). It was the safe- haven quasi-Deutsche-mark every other investor fleeing from the euro
FX TRADER MAGAZINE October - December 2011 23
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