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What is going on with the Swiss franc (CHF) ?

Written by Sam Coxhead on August 17th, 2011.      0 comments

2:10 PM (NZT) Here is a brief run down on events surrounding the Swiss franc and the massive volatility it has seen over the last week or so. For relevance sake lets use the EUR/CHF for the example as it is the most targeted pair from the Swiss national Bank(SNB).

The EUR/CHF low was 1.0067 and it has massively bounced back to the current level of 1.1430. The primary push has been caused by initiatives from the SNB to weaken their currency before its strength damages the domestic economy more than it already has. The SNB intervened in 2010 and it was one of the most expensive mistakes in banking history. This time is different because it is targeting the 3 and 5mth Forward(FWD) CHF markets, that is it has been flooding excess CHF into the FWD market that pushes the interest rates in that part of the curve close to zero. This has had a strong effect on the market and has directly led to the weakening CHF. Its effectiveness overtime remains to be seen, but even just the rumour of the SNB price checking 3month CHF last night sent the CHF lower, so in the short term this method seems to be most definitely working in the short term.
Today there has also been market chatter about the possibility that the SNB would engage in putting in place a “floor” where it would not allow the EUR/CHF rate to fall below. Without specifics it is impossible to know exactly how this mechanism would work, but the potential targets being talked about are at the 1.2000 or 1.2500 levels. Obviously these are a way higher from the current levels, so while these rumours remain live any dips in the EUR/CHF will be supported.
Of course lower levels of risk aversion will also be helping with the appreciation, and higher UK CPI and US Industrial Production numbers in the offshore session helped with this.