FX FUNDAMENTAL ANALYSIS
at current sub-1.40 levels, we expect gold to climb above $2000 on further risk aversion. Gold has exponentially increased in price as levels of global uncertainty continued to increase in the past 5 years. Te volatile nature of the recent surge to new record highs is just another sign of a panic driven trading environment that will continue to pressure the euro to the downside.
INTERVENTION
The uncertainty in the euro has provided strength to safe haven assets such as gold, but it has also forced investors to move their money into other safe haven assets such as the Swiss Franc and the Japanese Yen, strengthening them to record highs. Te Swiss National Bank, in order to protect its domestic economy, decided to intervene in the currency markets as they made clear that a rate below 1.20 EUR/CHF will not be tolerated. Te exact statement reads:
“Te current overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. Te Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. 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 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risk
Did Central Banks not learn anything from the Bank of England and the infamous “Black Wednesday”?
so require, the SNB will take further measures.” – Swiss National Bank
Did Central Banks not learn anything from the Bank of England and the infamous “Black Wednesday” - the day when the pound sterling had to be withdrawn from the European Exchange Rate Mechanism aſter the BOE was unable to keep the sterling above its agreed limit? Tis scenario is different this time around as the SNB is selling its currency as opposed to buying it, which means it can literally print as much paper as there is demand; however, the fact that 55% of its current reserves are in euro, the damage the ailing currency may cause this Central Bank’s balance sheet as well as others provides further indication
48 FX TRADER MAGAZINE October - December 2011
for a potential spike in demand for U.S. dollars.
CHART ANALYSIS
Te technical studies are pointing to much deeper and sustained setbacks for the euro. Te market consolidation that took place between May and July traded within very large ranges before settling into a tight ascending trend in August. Te attempt to break higher and above the 1.4500 level failed and price quickly began to drop. Te 1.4500 figure failed because demand for the euro for the prior four months was mostly coming from Central Banks diversifying their dollar holdings near the 1.4000 level. Tere was just enough market demand for a final
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