Time for the Swiss National Bank to wake up! EUR/CHF drops below 1.21 for first time since Jan 2013
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.
Last week we raised the question of what the Swiss National Bank is waiting for and why they haven’t intervened. In that article we said “Everyone has an uncle point and for the SNB there is no question that we are nearing that level…” At that time, EUR/CHF was trading at 1.4272 and apparently today’s record low of 1.4144 was all the SNB could handle!
They have denied to comment on the move in the Swiss Franc but a 265 pip rally EUR/CHF in under 6 minutes is exactly the type of move that only occurs when there is intervention. Most likely, the SNB had their buy orders sitting were right below 1.4150. Judging from the price action in EUR/CHF after interventions last year, the rally will probably not last particularly since the central bank is talking about raising interest rates.
For the eighth trading day in a row, EUR/CHF has failed to rally. The Swiss Franc even ended the day at a fresh record high against the euro as traders test the resolve of the Swiss National Bank. This has led many currency traders to wonder What is the SNB Waiting For? Why haven’t they intervened?
The problem is that even though the central bank has been warning about intervention, they have also been talking about raising interest rates. Over the past year, a lot of traders have sold Swiss Francs as a funding currency because of its low yield and now the prospect of a rate hike will force them to unwind their short CHF positions. Although intervention risk is exceptionally high at this time, the reason why the SNB has not intervened yet is because we are in a very different place now than in March 2009.
When the global financial crisis hit, there was a tremendous amount of deleveraging in which investors bought back Francs and closed their positions. Many Swiss banks also reduced their balance sheets, leading to downside pressure on EUR/CHF. In fact, net capital flow into Switzerland hit a record high last year. As a result, EUR/CHF fell aggressively at a time when the financial crisis was still unfolding, forcing the SNB to step into the market to weaken the Franc. The central bank intervened 3 times last year from what I can tell – in March, June and September. Since then, the global economy has stabilized, Switzerland came out of recession and the economy is improving.
With less to fear, the SNB has remained out of the market opting for verbal versus physical intervention. The trade surplus is a lot higher than last year and exports remain at healthy levels, reducing the need for intervention. Forex traders love to test the resolve of a central bank and I continue to expect them to do so until the SNB actually steps in. Everyone has an uncle point and for the SNB there is no question that we are nearing that level but as we have seen in the recent price action, betting on a move by the central bank can require deep pockets.
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