Traditionally during periods of market turmoil FX investors have turned to the Swiss franc and the Japanese yen. It is hard-wired in traders that the Swissie and the yen are the asset classes of choice when risk is sold due to their relative political stability and high proportion of debt held domestically.
However, not any more. After hitting record highs versus the euro and the dollar, the Swiss National Bank (the SNB) said enough-was-enough and started to directly intervene in the markets from August 3, 2011.
The SNB took the market by surprise and lowered interest rates to zero try and dissuade people from buying its currency. The logic was that if a currency doesn’t yield anything investors don’t earn a return and so won’t want to buy the currency. But old habits die hard. At the peak of last week’s turmoil when the markets were fearful for the European banking sector and as French bond spreads with Germany reached multi-year highs, the Swiss franc was a mere 70 pips away from parity against the euro.
After failing at its first attempt the SNB isn’t taking any chances and is currently boosting its weaponry to try and weaken the franc. It is reported to be looking at a potential peg to the euro, negative interest rates and even targeting a floor in EURCHF and USDCHF that would formalize direct intervention in the currency markets once the Swissie reached a certain level.
Rather than rush into the Swiss franc when the going gets tough, investors now need to take a step back and consider if they want to fight the SNB. After near capitulation there has been a massive rebound in EURCHF, which has surged by more than 10 big figures as the franc sagged. The SNB is serious and will do all it takes to dampen buying pressure on its currency.
The above article is written in part by author, Kathleen Brooks who writes for Forex.com and for Investopedia.
Anthony DiChi,
Your friend in Forex Currency Trading, FX Information and Forex News at TradeCurrencyNow