Yesterday’s move by the Swiss National Bank (SNB) is something everyone should be aware of. Why? Not because it affects everyone whose living costs are in dollars on a personal level but because of what it signals about the global economy.
First, what exactly did the SNB do yesterday? The Bank made a incredibly big and bold move by essentially declaring that it won’t accept an exchange rate versus the Euro (EUR/CHF) stronger than (below) 1.20. By so doing the bank is committing itself to buying unlimited amounts of Euros and building up its FX reserves to infinity. The EUR/CHF as well as the USD/CHF foreign exchange rates made huge moves of around 9% immediately following the announcement. For the more technically oriented readers note the large one day move on the daily chart of the EUR/CHF below and how it has room to higher levels until it reaches its 200 day simple moving average as well as the downtrend line originating in late 2010.
Why did the SNB make this move? The global economic turmoil in recent years has led more and more investors to seek the perceived safe haven of gold and the Swiss Franc (as well as U.S. Treasuries and Silver). Especially investors in the Euro zone have flocked to the Swiss Franc as the uncertainty about the Euro could have daunting effects on their personal finances. This seemingly insatiable demand for Swiss Francs has of course led the currency to significantly appreciate versus other currencies, specifically versus the Euro and the U.S. Dollar. The Swiss currency has become so strong recently that it started to dampened economic growth in Switzerland, hurting corporate profits, tourism, and farmers to mention a few.
While yesterday’s move by the SNB may be welcome by Swiss corporations here are some potential issues with this move:
- The SNB is doing this alone, without support by the neighboring countries, i.e. the EU. As such the relatively small Swiss economy and Swiss National Bank is being put at serious risk of falling apart by firing all it has at keeping the Swiss Franc from rising.
- Nasty inflation is a likely outcome for the Swiss economy in the future as the SNB is essentially printing Swiss Francs.
- The massive amounts of Euros the SNB will absorb will have to be invested somehow and from a liquidity and ‘safety’ perspective the likely investments will be German and French government bonds, which will lead to a widening of bond spreads between the northern and southern European countries. This widening of bond spreads will only make matters worse in Europe as the weak get weaker.
- Near-term this stabilizing of the EUR/CHF will aid European investors who want to flee to the Swiss Franc by allowing them to get more bang for their buck so to speak by converting Euros into Swissies.
The dollar, which has already started a good move off its lows may further benefit from this as European investors looking for safety may find it in the dollar as opposed to the Franc. In the weekly chart below see the major break above the trend line that the dollar has done versus the Swiss Franc on the back of yesterday’s SNB intervention.
Yesterday’s dramatic move by the Swiss National Bank is a sign of the times. Besides a hint of protectionism the move also shines light on how fragile the widespread the global debt issues really are. No one will be left unaffected.