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Swiss Franc Plummets as SNB Warns of Peg to Euro

Swiss Franc Plummets as SNB Warns of Peg to Euro

2011-08-11 13:34:00
Christopher Vecchio, CFA, Senior Strategist
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The Swiss Franc took a nose dive today after Swiss National Bank Vice President Thomas Jordan warned that a “temporary” Franc-Euro peg could be utilized to stem the safe haven currency’s rally amidst increased market uncertainty. The policymaker said that “any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability.” In the aftermath of what has been the harshest rhetoric employed by a central banker to date, the Swiss Franc plummeted across the board, losing more than 4 percent against each of the major currencies.

EUR/CHF 5-minute Chart: August 11, 2011

Swiss_Franc_Plummets_as_SNB_Warns_of_Peg_to_Euro_body_Picture_1.png, Swiss Franc Plummets as SNB Warns of Peg to Euro

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Although the Franc’s rally in the overnight erased the week’s gains, without any concrete action by the Swiss National Bank, such posturing could diminish the central bank’s credibility, making EUR/CHF parity a distinct possibility. Of course, given broader macroeconomic trends dictating high demand for safety, a currency peg would decrease demand for the Franc while simultaneously also boosting demand for the Japanese Yen and the U.S. Dollar. On increased haven flows into the Yen, any significant action by the Swiss National Bank could trigger a series of actions by other central banks, such as the Bank of Japan, to weaken their currency as well.

USD/JPY Hourly Chart: August 1 to August 11, 2011

Swiss_Franc_Plummets_as_SNB_Warns_of_Peg_to_Euro_body_Picture_4.png, Swiss Franc Plummets as SNB Warns of Peg to Euro

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In other intervention-related news, Japanese Finance Minister Yoshihiko Noda warned that the government is “keeping an extremely close watch on currency moves, while working closely with the global community.” The Yen’s advance against the Greenback stalled in the overnight, after coming within pips of taking out the USD/JPY all-time low exchange rate of 76.283.

Before the North American session open, the U.S. Commerce Department released June’s trade balance figures, which showed that the trade deficit unexpectedly increased to the highest level since June 2008. The deficit gap spread by 4.4 percent to -$53.1 billion from -$50.8 billion in May, soaring past the -$48.0 billion forecast, according to a Bloomberg News survey. The drop in trade reflects declining exports abroad, perhaps a harbinger of cooled demand amid a global economic slowdown.

Thus far, on the day, the Dow Jones FXCM Dollar Index has traded mostly lower, falling from the session open of 9633.46 to as low as 9560.60. The index traded as high as 9643.13, and was trading at 9596.61 at the time this report was written.

Swiss_Franc_Plummets_as_SNB_Warns_of_Peg_to_Euro_body_Picture_6.png, Swiss Franc Plummets as SNB Warns of Peg to EuroSwiss_Franc_Plummets_as_SNB_Warns_of_Peg_to_Euro_body_Picture_7.png, Swiss Franc Plummets as SNB Warns of Peg to Euro

Swiss_Franc_Plummets_as_SNB_Warns_of_Peg_to_Euro_body_Picture_8.png, Swiss Franc Plummets as SNB Warns of Peg to Euro

Fundamental Headlines

Central Bankers Race to Protect Growth in 72 Hours of Crisis – Bloomberg

Swiss Franc Falls as SNB Sees Possible Euro Peg – Bloomberg

Europe Considers Ban on Short Selling – New York Times

Japan Sharpens Verbal Warning vs Yen Spike – Reuters

World Stocks Fall Back on European Bank Concerns – Reuters

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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