23rd January 2012
Later this week many of the world's leaders and economists will decamp to Davos in Switzerland for the World Economics Forum. It strikes me as rather odd that a group which spend much of their time warning about global warming are ready to supply so much hot air to an Alpine resort, but there you go! I too wish to consider Switzerland but for another reason and that is my long-running theme about the strength of the Swiss Franc and the problems that it has created around Europe with Eastern Europe being particularly affected.
The Swiss Franc has been edging towards the 1.20 Swiss Francs to the Euro cap ( cap in Swiss Franc terms) that the Swiss National Bank set against the Euro. If we go back to the 6th of September when this was announced we saw a one-day move from 1.11 to over 1:20. Indeed there were so many rumours about this in the run-up to it that the Swiss Franc had retreated already from a daily ECB fixing high of 1.0451. Perhaps this rumour stage should be named an Kashya after the wife of the head of the Swiss National Bank. For those who have not followed the story the wife of the head of the Swiss National Bank made rather a large currency trade on her own account which was of a direction that would benefit from her husband's later actions.
I do not know whether Mrs. Hildebrand was guilty or not in terms of knowing her husband's intentions but I will give you a thought. If you saw the wife of the head of a central bank making such a large currency trade would it contribute to rumours of a move? Frankly I cannot see any circumstance where it would not (these matters invariably leak) and accordingly we in effect had yet another casualty for central bank influence.
Once the move was made the Swiss Franc weakened versus the Euro and in general the media moved on (until the Mrs. Hildebrand episode). In late October the Swiss Franc even moved below 1.24 versus the Euro and for quite some time it moved in a range between 1.22 and 1.24. However as 2011 has moved into 2012 we have seen a strengthening of the Swiss Franc and we see it around 1.207 as I type this.
The Swiss National Bank will be on amber alert as I type this if I may put it in Star Trek terms, as it would not take much of a move for its cap to be directly challenged. More problems for the Euro zone where the Greek debt haircut talks immediately come to mind, could do it rather quickly. Of course exchange rates ebb and flow and we could see a recovery in the Euro in the short-term but it is interesting that the recent general Euro rally has not impacted here. This comes inspite of some investment houses recommending buying the Euro against the Swiss France because of the currency cap.
As these matters tend to progress very fast when they come to fruition, I thought it best to mark readers cards now. Also should the currency cap break events would be extremely volatile and fast-moving.
What happens as we move towards 1.20?
The Swiss National Bank will begin its intervention efforts. As a first move central banks usually check exchange rates in a type of implied threat and if that does not work they then intervene directly.
Should continual intervention be required then the Swiss National Bank has promised this.
"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
So it has adopted as "macho" a position as it can. This sounds good for publicity and such matters, but it is seldom wise to completely endgame yourself which is exactly what it has done here. There are quite plausible scenarios where a default or even defaults in the Euro zone could see a tsunami type amount of cash demanding Swiss Francs.
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