Tuesday, September 06, 2011
We were going to write something on Dax. But the Swiss move has buried us with related stuff.
Here's the SNB statement:
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it 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.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.
TMM translation - If you dare to try and trade EUR/CHF under 1.2000 you will be made to sit on the naughty step.
Some quick TMM thinking aloud -
SNB just announced that they are the World's issuer of currency and liquidity provider of last resort.
This is the boldest response we have seen from anyone during this crisis. They must have been watching Crocodile Dundee .."That's not an intervention.... THIS is an intervention"
SNB have handed monetary control of Switzerland to ECB
SNB have lost control of their balance sheet.
SNB may also lose control of their mandated responsibility towards price stability
Is pegging yourself to a currency that may split in two the wisest thing to do?
Is the act of pegging to euro to be read as a huge vote of confidence in it?
Swiss rates "should" converge with Europe if currencies are pegged.
BUT If you have the choice of buying CHF or EUR assuming that they are pegged, then on a "will it be there tomorrow" front you always buy CHF
So that means that interest rates CAN be different and will solely reflect Euro blow up risk plus SNB failure risk.
So that means that the EUR spread over CHF is now the new bench mark of Euro blow up risk. ( CDS like)
The difference between the market price of Eur/chf volatility and zero should be seen as the Market perception of the risk of the SNB failing.
EURCHF 1 month Vol though off 8 vol is still at 14%
This meant to be unilateral, but is it a clue of G7 intent?
Whether it works or not, this may well be the sentiment turn trigger we need to turn current uberbearish mood.
That move must have been RV hell.
Can all Eur/Chf spot traders please report to HR to arrange more time with their families.
And finally -- Pegs can always be moved !