The Swiss National Bank (SNB) made an incredibly bold move this week by essentially declaring that it won’t accept an exchange rate versus the euro (EUR/CHF) stronger than (below) 1.20 francs. By so doing, the bank is committing itself to buying an unlimited amount of euros and building up its foreign exchange reserves to infinity.
Why should investors care? Because of what this signals about the global economy.
The EUR/CHF foreign exchange rate, as well as the USD/CHF, made a huge move 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 move to higher levels before 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 perceived safe havens such as gold, silver and U.S. Treasurys. Euro zone investors have also flocked to the Swiss franc as the uncertainty around the euro could have a daunting effect 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 dampen economic growth inSwitzerland, hurting corporate profits, tourism and farmers to mention a few.
While the SNB’s move may be welcomed by Swiss corporations, here are some potential issues with this move:
1. The SNB is doing this alone, without support by the neighboring countries, i.e., the EU. As such, the relatively small Swiss economy and the SNB are being put at serious risk of falling apart by firing all they have to keep the Swiss franc from rising.
2. Nasty inflation is a likely outcome for the Swiss economy in the future as the SNB is essentially printing Swiss francs.
3. 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 inEuropeas the weak get weaker.
4. In the 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.
5. The U.S. 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 of the USD/CHF below, see the major break above the trendline that the dollar has done versus the Swiss franc on the back of the SNB intervention.
This dramatic move by the Swiss National Bank is a sign of the times. Besides a hint of protectionism, the move also shines light on just how precarious the widespread global debt issues really are. No one will be left unaffected.