It is a record breaking day in the Swiss Franc. Here’s a table comparing the biggest one day moves in EUR/CHF and USD/CHF since the inception of the euro in 1999. The SNB put a floor under the Swiss Franc by saying they will do all that they can to keep EUR/CHF above 1.20. Based upon the sharp moves today – the market clearly cares.
There was a sharp move intraday in EUR/CHF that smells like intervention…but was it? SNB member Hildebrand and the Bank of International Settlement has declined to comment on the move in the Swiss Franc. The first chart shows today’s price action in EUR/CHF and the second shows the price action of EUR/CHF when the SNB intervened back in March. The move in March was much bigger – 400 pips compared to today’s 100 pip rally. Therefore I think that the move in EUR/CHF today is most likely NOT related to SNB intervention. Probably a big take profit order to buy back EUR/CHF below 1.4640.
Today’s move in EUR/CHF: 100 pip rally
EUR/CHF chart of March Intervention: 400 pip rally
Although everyone’s focus is on the Federal Reserve’s interest rate decision this afternoon, we have a lot of action in the European currencies. If you notice, the Euro is one of the few major currencies to under perform the dollar this morning because of the massively well subscribed ECB refinancing. In my daily report on FX360, I have mentioned how the EUR/USD could pull back because European banks look at the refinancing as quasi Quantitative Easing.
Although this is a big story, central bank intervention is the big focus this morning. The Swiss National Bank is at it again! They have sold Swiss Francs aggressively, driving EUR/CHF and USD/CHF up more than 1 percent. Last week, I talked about how a move down to 1.50 creates a good risk / reward opportunity. EUR/CHF fell to 1.5007 last night, which probably triggered alarm bells at the SNB.
Here is a chart of the move in EUR/CHF this morning. On FX360, I posted a more thorough analysis as well as charts from previous SNB interventions.
The Swiss National Bank has been intervening in the currency market since March. Unlike other central banks who have failed at intervention, the SNB has done a fantastic job keeping EUR/CHF above 1.50 for the past 3 months. The SNB focuses on EUR/CHF over USD/CHF because the European Union is by far the country’s largest trading partner. The Swiss National Bank has a monetary policy decision on Thursday and interest rates are expected to remain at 0.25 percent. If they could, Switzerland would probably cut interest rates. The State Secretariat for Economic Affairs just released their latest economic forecasts. GDP growth is expected to contract by 2.7 percent this year compared to a prior forecast of -2.2 percent. The economy is also now expected to shrink instead of grow in 2010. Therefore the SNB will not be abandoning their loose monetary policies anytime soon.
However for currency traders, the more important takeaway from the meeting will be the Swiss National Bank’s reluctance to rescind its commitment to currency intervention. If that is the case, then current levels may present a buying opportunity for range traders as the SNB is likely to actively maintain this incredibly yawn inducing range in EUR/CHF.
Meanwhile the EUR/JPY trade that I posted earlier this week has hit its target of the first standard deviation Bollinger Band. The 50-day SMA now at 132.30 will provide some support but if that level is broken, we could see a move down to 130.
Last week’s intervention efforts have put a floor under EUR/CHF. The possibility of more gains was cemented by comments from SNB Member Jordan today who said that Switzerland could offer negative rates on deposits.
Many people may be scratching their heads wondering if the Swiss could actually follow through with its threat but they have!
In the 1970s, Switzerland offered negative interest to discourage foreigners from holding Swiss Francs. Back then, everyone was worried about the value of currencies and were looking for a safe haven and the Swiss Franc was it for many investors. Demand for Francs at that time was so strong that foreign investors had to pay a premium for the privilege of holding it.
Before the SNB implemented negative interest rates, USD/CHF fell 28 percent. In 1972, the SNB restricted bank lending and demanded negative interests of up to 10% per quarter (40% p.a.) on the growth of foreign deposits in Swiss Francs with domestic banks. This led to a 27 percent rally in USD/CHF over the next 6 few months (shown in chart below). The Swiss franc eventually resumed its rally, but not before significant weakness.
Click on Chart for Larger Version
SNB member Jordan’s comment that the central bank will not tolerate further franc appreciation indicates that they are serious about preventing further weakness in EUR/CHF. Should the Swiss National Bank seriously follow through with negative interest rates, it will translate into more gains for EUR/CHF.