By: Christopher Lewis
On Monday, we had comments coming from Swiss National Bank vice-Chairman Thomas Jordan stating that the SNB “Is always looking into the situation, if there’s a need for action…then we are prepared to take further steps.” The Franc immediately sold off as a result.
The Swiss National Bank has effectively killed off Franc speculation, as they announced a floor to the Euro at the 1.20 handle. With this in mind, the EUR/CHF pair skyrocketed on August 6th of this year as traders immediately covered their short positions. Since the announcement, the pair hasn’t dipped below that level and has consistently bounced between the 1.23 mark, and the imposed floor.
On Tuesday, Mr. Jordan turned around and clarified his statement by saying: “It would be wrong to engage in competitive devaluation.” In other words, depreciate the value of the Franc. The Franc immediately spiked higher as a result of his comments. The pullback in the EUR/CHF and USD/CHF was sharp, but did in fact retreat slightly as there seems to still be a bias to the long side for both of these currencies.
The 0.90 level seems to be key in the USD/CHF, and with all of the turmoil in the EU recently, one would suspect that this is the pair that has the path of least resistance to the upside. With the SNB essentially pegging the Franc, and the Bank of Japan fighting its own war against the value of the Yen, the US dollar has become the de facto “safe haven” currency at the moment. This can be seen against a lot of the usual suspects such as the Australian dollar in times of market bearishness, but also against the Franc when the same conditions appear. The usual inverse correlation between the USD/CHF and EUR/USD has also broken down recently. In times past, as one rose, the other fell. This isn’t the case recently at all.
With the problems facing the EU being far too much for the continent to correct in short order, it is likely that the US dollar will continue to appreciate against many currencies. However, the Franc offers a special opportunity in the fact that the market for it is small enough for the central bank to keep a lid on it, unlike the situation that we see in the Yen currently. Because of this, traders will more than likely follow the lead of the Swiss National Bank, and fulfill their wishes by selling off the Franc over time.