Swiss Franc to be managed: Where have we heard that before?
Tuesday, September 6, 2011 at 06:14PM
Silver Prices in Other

King Canute 07 sep 2011.JPG
King Canute

FRANKFURT (MarketWatch) — The Swiss franc plunged dramatically versus the euro and other major rivals Tuesday after the Swiss National Bank took the extraordinary step of setting a floor for the euro/Swiss franc exchange rate at 1.20 francs and vowed to buy “unlimited quantities” of euros to defend it


In a breakneck swing, the euro EURCHF +0.00%  traded at 1.2033 francs, up from around 1.12 francs ahead of the announcement, a rise of 8.9%, as traders stampeded out of short euro/Swiss franc bets. Other currencies also rose versus the franc, with the U.S. dollarUSDCHF +0.07%  jumping 8% to trade at 84.85 centimes. There are 100 centimes in a franc.

Swiss equities, which have been hurt by fears a strong franc undercutting Swiss exports, also jumped. The Swiss Market Index CH:SMI +4.36%  rallied 4.4% to 5,367.24, with offshore drilling firm Transocean Ltd. RIG +0.01%   CH:RIGN +12.01%  up 12% and drug firm Novartis AG CH:NOVN +6.30%   NVS -0.65%  up 6.8%.

“With immediate effect, [the SNB] 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 said.
But analysts said the SNB’s toughest battle lies ahead, particularly if ongoing tensions in the euro zone continue to stoke investor appetite for safe havens.

“This is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve,” said Paul Mackel, currency strategist at HSBC in Hong Kong. “Putting EUR-CHF at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place.”

The SNB had previously moved to boost franc liquidity and taken other steps in an effort to arrest the rise of the franc amid fears over the toll of a strong currency on the nation’s economy. Tuesday’s salvo was its strongest statement yet.

The European Central Bank, in a statement, said its Governing Council had been informed of the decision by the SNB and said the Swiss central bank made the move “under its own responsibility.”

The Swiss franc, long a favorite safe-haven currency, has seen massive inflows as worries over the euro-zone debt crisis and the global economic recovery have mounted.

The central bank said the “massive overvaluation” of the franc poses an “acute threat to the Swiss economy” and carries the risk of deflation, prompting the SNB to seek a “substantial and sustained weakening of the Swiss franc.”

The SNB said that even at 1.20 francs per euro, the Swiss currency remains high and should continue to weaken over time, warning that it is prepared to take other measures if required by the economic outlook and deflationary risks.

Intervention could be costly

The move by the SNB puts the central bank in direct conflict with a strong desire by market participants to buy safe-haven assets, said Jane Foley, senior currency strategist at Rabobank in London.

“In the very probable event that the euro-zone crisis worsens in the coming months, intervention could be very costly for the SNB,” she said in emailed comments.

Sharp losses in a previous round of intervention in 2009 and 2010 to hold down the franc versus the euro had provoked sharp criticism of the SNB in Switzerland. But the franc’s renewed rise has underlined economic fears, building support for more aggressive efforts to rein in the currency.

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As we see it, this might be harder to achieve than the Swiss bankers have imagined. The world is rolling in turmoil everywhere we look and the move to both gold and silver as a safe haven is testament to the nervousness of the people. With both the United States and the Eurozone looking like the walking dead the hunt is on for security and the Swiss Franc is one of those bolt holes. It will be interesting to observe as they try and stop the tide of money coming in, after all King Canute failed.

It also raises the question of why would you want to place your hard earned cash into an asset controlled by people who’s stated aim to stop it from going higher!

This can only be good news for all us silver bugs, expect a sparkling fourth quarter with a stunning move to the upside albeit on golds coat tail and a stampede by the shorters to cover their positions.

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sk chart return on SK OptionTrader Model Port 22 aug 2011.JPG

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Stay on your toes and have a good one.

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