The Swiss central bank's decision on March 12 to intervene in the currency market and lower interest rates to 0.25 percent from 0.50 percent came as no surprise, however what followed caught the currency market off guard.
The Swiss started a massive currency intervention program. It sold francs and bought tons of euros, pounds, and dollars, which caused the EUR/CHF pair to spike. This tame pair normally averages 70 pips of movement per day, but on March 12 it jumped 500 pips.
This was the biggest move the EUR/CHF pair had in such a short time since the creation of the euro. The pair ended up moving a staggering 4.7 percent for the week.
The Swiss, like the Japanese, have been crushed recently not only by the global slowdown but also the enormous appreciation of their currency. The 11 percent appreciation that the Swiss franc had against the euro last year has taken a huge toll on Swiss exports to the rest of Europe as well as to the United States.
The EUR/CHF exchange rate had to be forced upward, and that's exactly what the Swiss central bank did. Not only that, it did it when the market least expected it and when the EUR/CHF had made a slight recovery on its own just beforehand.
This massive move caught tons of currency traders off guard since they'd been comfortably short the EUR/CHF currency pair since last August. However, on March 12 the Swiss central bank drew a line in the sand. It sold its own currency vigorously and bought several currencies, especially the euro, since it's the most important to their exporters.
The Swiss central bank hasn't done any solo intervention like this since 1992. That's what makes it such a big deal. These moves are rare, but powerful and they send a statement to the market.
A strong franc has serious implications on the Swiss economy. The Swiss bank says the country's economy could slump as much as 3 percent this year. That hasn't happened since 1975. It also says that inflation will be very close to zero in 2010 and 2011.
Swiss exporters can't afford to have a EUR/CHF exchange rate at or below 1.50 for very long. They would welcome an exchange rate of 1.55 to 1.60 minimally, and they need these levels to be sustained. But the exporters have been getting crushed when the exchange rate went down to 1.45 recently. It's held below 1.50 for most of the time since last October.
I see the EUR/CHF eventually making its way back up to the 1.55 to 1.60 levels in the coming weeks to months. But, with the strong move that we saw this past week, a near term pull back in the EUR/CHF pair would not surprise me.
Many times after a currency intervention, the market will run the pair back down a bit to "test" the central bank. It wouldn't shock me if this happens this time. So be on the lookout for this pull back.
However, over the coming months, I think you will find that the pair will eventually settle in at the levels mentioned above and, in the end, the central bank will win.
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