Sunday, September 21, 2014

Swiss National Bank gets ready for intervention | Mario Draghi speaks today

Back in 2011 the Swiss monetary authorities became very concerned about the strength of their currency, as did all Swiss citizens, but particularly those who depended on earnings from abroad. This included not only exporters, but also people involved in the tourism industry. The cost of living in Switzerland was already quite high and the appreciation of the Swiss franc against the Euro, the currency of their largest trading partner, had become alarming.

Because of the arrangement of the currency pair, a fall in EURCHF means that the franc is rising in value.

For quite some time, the Swiss National Bank (SNB) tried to talk down the currency. There was a period when there seemed to be a cat and mouse game going on between the Swiss and the major hedge funds and other institutions that are foremost in currency trading. Swiss citizens talked openly of a conspiracy against them, using the currency as a weapon.

Then, in 2012, the SNB announced that it would spend whatever cash was required to purchase Euros on the Foreign Exchange markets so that a floor would be maintained under the pair, at 1.20 Euros to the Swiss franc. As can be seen from the chart above, that has worked in the interim. Now, however, the 1.20 level is again on the horizon. We can therefore expect direct intervention in the market to avoid a fall below this level. The Swiss have a lot of money. Have they enough?

Mario Draghi speaks today

The Swiss authorities might be expecting some assistance from the governor of the European Central Bank, Mario Draghi, when he speaks later in the day at the commencement of the Quarterly Hearing before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels.

The Euro, of course, has been falling against all its major counterparts of late. Mr. Draghi is not expected to say anything that will change this, as a weaker Euro fits in with the ECB’s desire for higher inflation across the Euro zone. Nevertheless, his words will be listened to and parsed, and we would imagine not least by the treasury department of the Swiss National Bank.

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