Even at my age, I’m capable of being surprised. The Swiss National Bank, already under water to the tune of roughly $35 billion on the Euro holdings it has added through its attempts to keep the CHF from strengthening, announced earlier today that it would defend a “minimum rate” versus EUR of 1.20. The SNB’s EUR reserves at last report amounted to roughly $164 billion.
As the chart above indicates, the cross had traded as low as 1.1020 prior to the announcement. After traders had a moment to digest the import of the announcement, it spiked as high as 1.2191, a quick 10.6%, which of course would be magnified in leveraged accounts.
Short EUR/CHF has, of course, been a popular “risk off” trade, as CHF, along with JPY, was considered a haven in time of turmoil. Now, the for the moment, there is one fewer. My desk has seen demand for NOK from a number of banks today, suggesting that this will be one popular destination for those looking for a degree of safety.
Views are mixed as to whether the SNB will be successful. In the near term, it can print as many Francs as it needs to, but this will create other problems over time. The consensus view appears to be that once the central bank is removed from the political crosshairs (the Swiss have federal elections in October) it may feel less urgency to spend unlimited amounts, as it promised, to prevent EUR/CHF from dropping below 1.20
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