Will the SNB Hit the Brakes?

Last week, traders were on the lookout for possible currency intervention by the Swiss National Bank (SNB). With the EURCHF now falling below a key support level, are the SNB sharks getting ready to snap their jaws and attack the markets?

Despite the decision of SNB clock-master Jean-Pierre Roth to leave interest rates unchanged at 0.25%, the EURCHF found itself dropping more than 500 pips over the past three months. What’s interesting is that the ECB‘s benchmark interest rate still stands at 1.00%, 75 basis points higher than the SNB’s. Based on the interest rates alone, investing in the EUR should be more attractive but this is not the case as we are currently seeing. What gives?

Apparently, bearish sentiment towards the euro brought about by Greece’s debt problems has significantly weakened the euro versus the Swiss franc. The strong rise of the franc has caught the eye of SNB President Philip Hildebrand, who then said that the central bank will look for some measures to prevent the Swissy from rapidly appreciating.

Why the heck does the SNB want to intervene anyway? Wouldn’t an excessive increase in the purchasing power of the CHF be good for Swiss consumers? Quite the opposite, actually…

In order for a country to buy another nation’s exports, it must first convert their money into that nation’s domestic currency. For this reason, it only follows that whenever a nation’s currency rises in value, that nation’s exports becomes more expensive to other nations. And since Switzerland’s economy is heavily export-dependent, an excessive appreciation of the franc could end up hurting business activity in the country, which in turn, could trigger an economic slowdown.

Despite the looming threat of currency intervention, traders still seem dead-set on buying up the Swissy. You see, people still prefer Swiss chocolate over French baguettes or German sausages! Investors would rather place their money in Swiss assets since Switzerland isn’t exactly burdened by debt problems unlike the euro zone.

In fact, just yesterday, the euro sold off against most majors as European Union officials continued to squabble over the contingency plan for Greece. It sure is tough to reach an agreement in a region comprised by 27 different nations! Switzerland, which isn’t part of the bickering in the European Union, seems to be standing on more solid ground.

If you take a look at the chart I posted below, you’ll notice how the EURCHF has been on a downtrend. In the past, it was common to see a large sudden spike in the price since the SNB just wouldn’t let the CHF appreciate too quickly. The fact that price action broke the 1.4600 mark is pretty surprising.

PoD Chart

About this time a year ago, when the EURCHF had hit 1.4600, speculation was that the SNB would intervene. And boy, did they make their presence felt on March 12, 2009. That day, the EURCHF rose 500 (That’s right – FIVE HUNDRED) pips to close at 1.5300! Imagine if Cyclopip had caught that move, he would be driving a Ferrari right now!

Let me warn you though, central banks seem to intervene just below the key support level. So even though the SNB hasn’t hit the markets with a “surprise” intervention, it would best to keep an eye out for movement on this pair. Remember, if the SNB does intervene, it would have to purchase a lot of euros or to sell a lot of francs. This could create a ripple effect across the market, causing the EURUSD and EURJPY to rise as well.