In the first Swiss National Bank (SNB) monetary policy assessment with interim Chairman Thomas Jordan at the helm, the central bank announced that it will be making no changes to its monetary policy and that its target range for the three-month LIBOR will stay unchanged at 0.00-0.25%.
Though interest rates remained untouched, the SNB did make revisions to its growth and inflation forecasts. Citing signs of economic stabilization, Jordan said that the central bank now sees 2012 GDP growth at close to 1%, up from its previous growth forecast of 0.5% back in December 2011.
In addition, he added that he and his fellow policymakers see downside risks to inflation down the line. As a matter of fact, they’re forecasting an annual inflation rate of -0.6% for 2012 and 0.3% for 2013. Keep in mind that just a few months ago, they were forecasting an annual inflation rate of -0.3% for 2012 and 0.4% for 2013.
Of course, what the markets were most interested in hearing was what the SNB had to say about the Swiss franc. According to the central bankers, they’re armed and ready to keep defending the minimum exchange rate of 1.2000 Swiss francs per euro “with the utmost determination.”
Heck, they even said they’re prepared to buy UNLIMITED quantities of foreign currency if that’s what it’ll take to keep the franc from rising!
But this announcement turned out to be a major disappointment for traders who had been speculating that the SNB would raise the EUR/CHF floor. Remember, they’ve been calling for the central bank to re-peg EUR/CHF at a higher rate since December of last year.
As you can see, prior to the announcement, EUR/CHF was showing unusually high volatility and was in the process of making a new monthly high. But after the SNB had announced that it was committing to stick to the 1.2000 peg, the market showed its disapproval by sending the pair back down below 1.2100.
It’s important to know that although the SNB didn’t raise the floor this time around, it still believes the Swiss franc is overvalued. Jordan added that the central bank “stands ready to take further measures at any time if the economic outlook and the risk of deflation so require.”
Cutting through all those words, this basically just means that the SNB is leaving the door open to raising the floor in the future. That’s right — don’t count out the possibility of a higher floor just yet!
That being said, this old man thinks that it’s highly unlikely that EUR/CHF will dip below 1.2000 any time soon. The market clearly has a lot of respect for the SNB and isn’t taking the central bank’s threats lightly.
Take a look at your charts and see for yourself — EUR/CHF hasn’t touched the 1.2000 handle since September of last year. Furthermore, you’ll notice that EUR/CHF hasn’t been very active in the past three months. The SNB has done a good job of killing EUR/CHF movement by setting a minimum exchange rate.
All in all, to me, it seems like there are two things we can take away from all of this:
First, with the SNB renewing its commitment to defend 1.2000, I think there’s a good chance that EUR/CHF volatility will die down again.
And second, as Cyclopip showed in his recent trade, it may not be a bad idea to load up on EUR/CHF long positions near 1.2000. But be prepared to wait a while before you see any action.
Then again, those are just my two cents on the matter. I’d love to hear what you all have to say about this, so feel free to share your thoughts in the poll and comment box below!