Friday 10 February 2012

Swiss Currency Peg Coming Unhinged?

Published: 30 January, 2012
written by: Jonathan Miller , Global Market Analyst

As the newest SNB Chairman faces relentless pressure following his predecessor’s missteps, all eyes are on interim appointee Thomas Jordan who seems to have a full plate. Besides dealing with the fallout of a serious ethics violation and another blow to Swiss banking secrecy, Jordan has rhetoric to maintain. Facing an exploding balance sheet, he must decide how to steer the ship as the EURCHF rapidly approaches the proverbial “line in the sand” drawn by his predecessor at €1.20. With liabilities rising and losses from maintaining the currency peg continuing to skyrocket, the SNB war against speculators might be rapidly approaching its end.

Currency pegs and artificially setting exchange rates have proved ineffective, most notably in the Bank of England’s quest in the early 90s that resulted in massive profits for George Soros. The SNB will likely be ramping up rhetoric in the next hours and days as the threat of action is often more effective than the action itself (note recent activity from the Bank of Japan). Speculators can play this war of attrition longer than the SNB as they have far greater ammunition at their disposal, plus the luxury of time. As the EURCHF tests 1.2040 the next support level is at 1.2025 and from there the SNB’s resolve will ultimately be tested at the 1.20 level.

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