The Swiss National Bank (SNB) has announced that it intends to keep the euro/CHF rate at a minimum of 1.20. The Swiss franc has understandably sold off sharply across the board in response to the announcement.
Richard Driver, analyst for Caxton FX, said: “With the SNB warning the Swiss public that they would have to endure a strong Swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment to limit the currency’s strength. The SNB’s announcement this morning referred to ‘utmost determination’ to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.”
The chances of long-term success remain dubious though, according to Driver: “Central bank currency intervention has repeatedly been shown to be ineffectual; we have seen it in both the yen and the Swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. The SNB definitely looks serious this time though, claiming willingness to buy ‘unlimited quantities of foreign currency’. Whether it is successful or not, it is likely to cost the SNB hugely.
“The euro/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the Swiss franc will persist. There could be some further major moves in the offing as well, as other central banks respond.”
The short-term impact has been huge, Driver concluded: “Knee-jerk moves saw the euro/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/euro has declined fairly sharply as investors get out of the Swiss franc and into the single currency.”
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