SNB vs The Market, Round 2

The SNB has thrown its hat into the devaluation game, in the face of its currency exploding higher of late. Earlier this morning, they announced that they planned to cut Libor rates to less than the current 25 basis points, with a view to further intervention should the Swiss Franc (CHF) continue to appreciate. The last time the SNB made noises in the currency markets was in May 2010, intervening in currency markets to prevent the Swiss Franc from appreciating. From the article:

“With this drastic decision, the Swiss National Bank has completed a surprising about-face,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “The exit from unconventional policy has been suspended and rate increases pushed far into the future. For that reason we would no longer rule out direct currency intervention.”

Since that intervention of a year ago, the SNB has sat idly by while the CHF has appreciated against all of the other major currencies. Of course, the attempt to manipulate the currency is foolish from an economic point of view. The official line of thinking here undoubtedly is export protection, even though exports have done fine in the face of Swiss Franc appreciation thus far. Anyone holding Swiss Francs has been enjoying the increased purchasing power the appreciation has brought. The catalyst for this appreciation has been a flight to safety, as global fundamentals have been rolling over steadily in the past 6 months.

Not only is it foolish from an economic point of view, it will likely be foolish from a trading perspective. Here’s what happened the last time the SNB stepped in:

The circled area is where the intervention took place, as the CHF tumbled roughly 500 points against the Euro. Note that this was short lived, and less than 2 weeks later, the CHF was right back where it was pre intervention. The cost of this exercise was roughly CHF 20 billion.  This most recent decision by the SNB and the threat of intervention may dampen the recent move for a bit, but it is very likely that what happened in spring 2010 will repeat itself, as fundamental conditions continue to support a strong CHF.


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