The Ramifications of the SNB Move

Lior Alkalay - Contributor - Forex

By now you’ve heard the news; a Swiss tsunami has hit FX markets. In a historic move that took even the most seasoned investors and experienced brokers by complete surprise, the Swiss National Bank (SNB) has removed the 1.2 floor for the EUR/CHF, effectively eliminating the Swiss Franc’s peg to the Euro. The Swiss Franc, as a result, surged a jaw dropping 38% vs the Euro and 29.7% vs the Dollar in only a few hours, leaving Swiss equities tumbling and Swissie bears crushed. Undoubtedly, this aggressive move and the volatility it generated will be talked about for years. But what does this SNB move say about Switzerland, about the Euro and, more specifically, about the Swiss Franc’s future?

Switzerland and the Euro

When the SNB decided to abruptly terminate the peg to the Euro it sent a very strong and, to put it bluntly, dire message on Europe and European bonds. With each and every occasion that the SNB had to protect the 1.2 peg it was forced to buy Euros and purchase a European sovereign bond. With the SNB balance sheet reaching 75% of Swiss GDP, the SNB deemed the risk of holding more European bonds higher than the backlash that might be generated by releasing the peg to the Euro. This illustrated just how uncertain the SNB is about the future of European bonds. With the SNB judging the chances for an ECB QE as high, SNB members assume that that could create another wave of SFr demand and force them to increase European bond holdings even more. It would seem that that was simply too much to bear for the SNB because, with this move, it suggests that it is willing to risk a collapse in exports and put a huge strain on the financial system in order to avoid holding any more European bonds.

But the SNB conveys another message well beyond just its distrust in European bonds. The SNB move, which was combined with an aggressive rate cut to a negative -0.75%, signals that the SNB has perhaps abandoned earlier ambitions to propel Swiss growth via exports to Europe and is willing to shift instead to growth based on internal demand. That assumption would explain the rate cut move at the expense of the currency peg; i.e. less exports and more internal demand, thus illustrating how pessimistic the SNB really is on the likelihood of demand from Europe rising.

The Implications for the Swiss Franc

So how will this big “assumption” by the SNB affect the Swiss Franc? Of course, after the CHF stabilized, 17.25% higher against the Euro and 16.2% higher against the US Dollar, an investor’s natural instinct would be to bet that the Swiss Franc would strengthen further. Yet, and while this may very well be the case against the Euro, the CHF’s ability to strengthen vs the Dollar should be questioned because the latest move might just lead to a long term reversal in the USD/CHF and a prolonged Dollar appreciation vs the CHF.

Why the Swiss Franc may Actually Turn Bearish

The reason why this seemingly hawkish move by the SNB could turn bearish for the Swiss Franc is simply a matter of trust, or perhaps more aptly phrased, distrust. The SNB move has shaken investors’ trust in its policies and signaled two things that investors had, heretofore, taken for granted. The first is that the SNB had a detailed plan in place to end the peg. However, the latest signals suggest the exact opposite; the SNB terminated the peg with less than poor performance and, moreover, did not prepare investors or take any action before hand to curb speculation, all of which, consequently, led to this unprecedented volatility. The fact is, investors expect the central banks of so-called “safe haven currencies” to be better managed than central banks of “standard” currencies. Expectations of the SNB’s integrity and reliability now having been quashed, the SNB has, thus, effectively undermined the CHF’s long-held stance as a safe haven currency. The second assumption, also now shattered, is that the SNB had “unlimited firepower” to curb investor speculation which has clearly now been proven not to be the case. Given these dynamics, the Swiss Franc’s status as a safe haven currency has, consequently, been shaken to its core.

From an economic standpoint, now, without the peg, the Swiss Franc is exposed to carry trade shorts with its negative rate of -0.75% vs the US Dollar, in its own right a safe haven currency, which may be impacted by an interest rate hike from the Fed sometime this year, thus prompting investors to borrow CHF and buy USD in a classic carry trade bet.

Watch for the Monthly Chart

Finally, and as always, while fundamentals present the opportunity, the charts present the timing. As seen in the chart below, the USD/CHF is about to generate a double bottom pattern on a multi-month basis. If this pattern is maintained until the end of the month, it could very well signal that the reversal of the USD/CHF is on the way and that, perhaps, the pair is ready to bounce higher to levels previously believed to be farfetched, perhaps the 1.2 or even the 1.3 level. All in all, even if the trend takes a while to materialize, it is clear that, this week, the Swiss Franc has lost its safe haven status and may, sooner or later, be on a slippery downward slope and lose value.

Chart provided courtesy of

Look for my post next week.

Lior Alkalay Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

2 thoughts on “The Ramifications of the SNB Move

  1. Quite a brilliant analysis deserving full attention but need to add the following fundamentals:
    1. the SNB lost its credibility first time this decade when they pegged the CHF to the EURO over three and a half years ago
    2. the SNB lost its credibility second time last November with their desperate propaganda against the referendum for compulsive gold reserves at 20 per cent of their foreign reserves
    3. Egon von Greyerz publicly stated so 45 days before they did undo the peg
    4. Switzerland is a stable island surrounded but a sea of EUROs hence flooded with Euros in its shores. The parity to the USD is less relevant than to their EURO trading parties
    5. the adage goes that if any central banker fails to destroy his/her currency they ought to resign. The SNB may take additional steps - increasing the negative interest rate from 0.75 to infinity as would suit their policy
    5. the Swiss have traditionally been best money managers
    However, non-technical, the above may strengthen the case for the CHF at up to 1.30 to the USD at a time ahead of us.

  2. This recently large shift, in what was seen to be a stable instrument, is really mearly the result, as often occurs in the markets, of an oppurtunity that was to good to pass down, for the liquidity providers in the position to capitalise, by going in the opposite direction to the retail holdings. It was a quick snatch and grab and a HFT dream on the Short side.

    However we see this play out again and again, with Gold, Oil and the Stock market, its the same old pump and dump scheme, thats been the backbone of economies and markets since their inception.

    Where is this heading, well the usual viscous circle, Interest rates (consumer credit) will increase, food will become more expensive, wages will decrease, property prices will decrease, Gold will offer a false shelter from the storm, Oil prices will increase, along with the cost of living...followed by major cuts to health, education and welfare...

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