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SNB Shocks FX Market By Setting Floor in EUR/CHF

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Top Stories

  • SNB intervenes in the market set rate in EUR/CHF at 1.20
  • Swiss CPI shows deflation
  • Nikkei down -2.21% Europe up 0.36%
  • Oil at $84.48/bbl
  • Gold at $1901/oz.

Overnight Eco

  • AUD Current Account Balance (Australian Dollar) (2Q) -7.4B vs. -7.3B
  • CHF Consumer Price Index (YoY) (AUG) 0.2%
  • CHF Consumer Price Index (MoM) (AUG) -0.3%
  • EUR German Factory Orders s.a. (MoM) (JUL) n/a

Event Risk on Tap

  • USD ISM Non-Manufacutring Composite (AUG) expected at

Price Action

  • USD/JPY jumps to 77.00 off SNB move
  • AUD/USD taken to 1.0600 after SNB but quickly trades back to 1.0550
  • GBP/USD leaps to 1.6200 but retreates
  • EUR/USD trades towards 1.4200 in wake of SNB

Signaling that it was clearly fed up with the relentlessly rising franc the Swiss National Bank shocked the currency market today and intervened to weaken its own currency setting a floor in the EUR/CHF at 1.2000 rate. Fearful that the persistently strong Swissie could damage the country's vital export sector and usher in an unwelcome period of deflation the SNB moved aggressively in the FX market prompting a massive short squeeze across all the CHF pairs.

"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the SNB said in a statement. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."

The SNB added that even at a rate of 1.20 francs to the euro, the franc was still high and should continue to weaken over time: "If the economic outlook and deflationary risks so require, the SNB will take further measures."

Earlier in the session Swiss CPI data confirmed SNB's deflationary fears when it printed at -0.3% vs. -0.1% eyed and may have been a contributing factor to the central banks extraordinary policy decision. Having now drawn the line at 1.20 the SNB will have to spare no expense to defend that level if it is to maintain credibility in the market. Otherwise its attempts at intervention will prove as futile as those of the BOJ as speculators test the central bank's resolve. In fact, if the SNB is unable to keep EUR/CHF above 1.20 its gambit may quickly backfire, as newly emboldened shorts could try to push the pair towards the critical 110.00 level opening the way for another run towards parity.

For now the EUR/CHF 1.2000 level holds but will no doubt be tested again during North American session as US traders return from the Labor Day holiday. Despite SNB's best efforts the fate of the franc is largely a function of risk aversion flows and to that end tomorrow events n German could prove to be key in setting near term direction of the unit. Tomorrow, the German constitutional court is set to rule on the legality of using German taxpayer funds for various bailout schemes in the region. If the judgment agrees with the plaintiffs, the decision could undermine any attempts to stabilize the credit markets in EZ periphery and could spark a fresh round of risk aversion flows which in turn will increase buying pressure on the franc and will offset any policy actions by the SNB.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 14:00 10:00 ISM Non-Manufacutring Composite (AUG) 52.7

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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