Yesterday, speculation that the central bank may peg EUR/CHF at 1.2500, up from its original 1.2000 target, not only boosted the pair sharply, it also caused crazy volatility on the charts. As you can see below, EUR/CHF jumped 150 pips in under 45 minutes during the New York session.
For one, the persistent strength of the franc has already bogged down its exports, which fell by as much as 7% in August after rising by 1.4% in July. The decrease weighed on the country’s trade surplus, which narrowed to 0.82 billion CHF last month from its 2.81 billion CHF figure in July. Heck, the Swiss government even had to downgrade its economic growth forecast for 2011 (from 2.1% to 1.9%) and 2012 (from 1.5% to 0.9%)!
Even though it has already set a floor for EUR/CHF at 1.2000, the SNB still believes that the franc is overvalued. Furthermore, many believe that in order for it to transform the franc from a burden to growth to a contributor to growth, it’ll have to depreciate much further.
If recent price action is anything to go by, the markets certainly seem to be taking the SNB’s threats and actions seriously. Ever since the EUR/CHF peg was announced, the pair has been as behaved as a momma’s boy and has stayed well above 1.2000.
In addition, if you compare the franc’s recent moves to those of other traditional safe haven currencies, you’ll likely find a big discrepancy. While the U.S. dollar and Japanese yen have been making headway on the recent bout of risk aversion, the Swiss franc has been weakening, if not trading steadily.
But to be honest, the SNB may not even have to act to keep the franc from gaining ground. The fact that investors BELIEVE that the central bank MAY intervene again could be enough to keep them from buying back the franc. Forex markets are full of these self-fulfilling prophecies! For as long as the markets believe the SNB has reason to act, the franc will have a hard time finding buyers.