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FX Day Trading - 7 September 2011
The EUR/CHF exchange rate is 1.20
Thus spoke the Swiss National Bank
German court bailout decision due
For two years the EU authorities have grappled with the seemingly insoluble problem of how to prop up the euro.
Spread betting investors and banks have wrung their hands at the way a financial crisis has morphed into an economic crisis, a debt crisis and, most recently, a political crisis. Yesterday, in a way that would have made Horace weep, the Swiss National Bank emerged as the deus ex machina that will prove to be the euro's salvation. For now, anyway.
For a couple of months the Swiss authorities have alternately denounced and threatened the investors who were buying their little currency up to increasingly uncomfortable levels. The SNB intervened, then it took interest rates as close to zero as it could.
There was talk of a peg to the euro and last week the government announced a CHF870 million stimulus package. None of it had more than a fleeting impact and over the last week the franc had been heading back towards its record high against virtually everything.
Yesterday morning the SNB unveiled Plan E. The Bank "will no longer tolerate a EUR/CHF exchange rate below one Swiss franc twenty. The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities."
The market swallowed the story hook, line and sinker. As if by magic the euro screamed higher, appreciating within less than twenty minutes from SFr 1.12 to fractionally over SFr1.20.
So can the SNB do what it says and buy "unlimited quantities" of foreign currencies (presumably euros, if that is the anchor)?
Sure it can. As master of its own balance sheet a central bank can create money at will, simply by making a ledger entry, just as the Federal Reserve and the Bank of England have with their quantitative easing. They spent the money on bonds, the SNB will spend it on euros.
The action runs the risk of driving inflation higher but the latest Swiss data showed prices falling in August and up by just 0.2% on the year. Inflation is a distant threat to the SNB; what it fears most is deflation.
The Swiss franc development overshadowed – and confused – the FX spread betting market. Most currencies changed direction at least a couple of times as investors reviewed and refined their interpretations.
The euro climbed, subsided and recovered against the US dollar to open this morning unchanged from its position at the same time yesterday. Sterling is lower, held back by the nagging fear that the MPC might announce another round of quantitative easing on Thursday. Euro/Swiss is at 1.20000001.
Four things matter today. Australian GDP, already out, rebounded to grow by 1.2% in the second quarter; the Aussie went higher on the news.
UK and German industrial production come out this morning; neither will be fantastic, the UK numbers could be flat.
The Bank of Canada will probably hold its interest rate target at 1%.
And the Karlsruhe constitutional court is due to deliver its verdict on the legality of handing German taxpayers' money to Club Med mendicants. Don't expect the verdict to improve faith in the bailout process.
Currency Trading and Spread Betting carry a high level of risk to your capital and you can lose more than your initial investment, they may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
The above content does not constitute investment advice, it is provided purely for information purposes and is delivered as a personal view of the writer. Neither the contributing company (or writer) nor Online-Spread-Betting.com accepts any responsibility for any use that may be made of the content.
'EUR/CHF Spreads Jump Higher on SNB Euro Peg Intervention', Article by Moneycorp, last update: 7-Sep-11
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