The USD/CHF has been such a god-send to forex traders over the past year.
While everyone else has been up and down like a fiddler’s elbow, USD/CHF has been trading in a nice, steady downward channel.
Loads of opportunities to sell on each retracement.
This kind of market is the forex trader’s dream – a clear direction, lots of retracements to a trend line…
But then the Swiss National Bank went and spoiled the party…
In early August, the Swiss National Bank stated concern about the strength of the Swiss franc, saying that pegging the franc against the euro wasn’t out of the question.
This spooked investors, and had this effect on the markets…
But then, central banks often talk the talk – whether they actually walk the walk is another thing.
Would the Swiss really carry through their threat?
Apparently yes – this week, the Swiss National Bank (SNB), led by Pihlipp Hildebrand, set a floor against the euro at 1.20 francs.
And the markets did this…
Ouch. There goes my trendline!
What are the Swiss up to?
For some time now, the Swiss central bank have been lamenting their status as a “safe haven” in the midst of the global financial crisis.
As money has piled out of the euro – it’s piled in to the Swiss franc.
And the result is that by August this year, the value of the franc had risen by around 30% against the euro and 40% against the dollar since 2008.
It’s nice to be wanted. But this was getting ridiculous.
A strong currency can have a crippling effect on a country’s export market. Swatch, the Swiss watchmaker, warned that the franc’s appreciation could cost it 1 billion francs (£730m) in sales this year.
So the Swiss central bank decided that enough was enough.
And they have declared a very aggressive stance on controlling their currency, stating that they would “no longer tolerate” a euro rate below 1.20 francs, and would be prepared to throw unlimited funds at keeping their exchange rate there.
By which, they mean that they can keep their printing presses running day and night …
The result of this announcement was pretty spectacular – a move of 700 points on the currency in less than 10 minutes on Tuesday, and the price sticking neatly to the prescribed level of 1.2 since.
Tied to a sinking ship?
So, have the Swiss been successful?
Three days down the line, it looks like things are going to plan.
However, there is a long history of spectacular failure when it comes to interventions from central banks.
The Bank of Japan has repeatedly tried to control the value of its currency – and it’s never worked.
And, while the value of the euro has remained relatively strong when you take into account the tumultuous times it’s been living through – the SNB have hardly moored themselves in a safe harbour. Being pegged to the euro is more like being tied to a sinking ship.
Back in July the SNB said that it had already lost 9.9 billion francs from intervention this year.
There’s likely to be a lot more money going the same way.
Forex traders beware
If ever there was a lesson for forex traders to be mindful of what central banks are up to – this is it.
Even if you’re s strictly technical trader, you can’t avoid the effects of these kind of interventions.
The actions of the Swiss bank will be watched closely by Japan, Norway and Singapore – all of whom are suffering from overvalued currencies. And we could see a sharp escalation in currency wars.
If you’re looking for a safe haven that can’t put in capital controls or quantitative easing – it still has to be gold!
