Among many interesting developments in Forex trading during 2009, were efforts by financial authorities of some countries to weaken their own currencies. Earlier in the year, with world in deep recession, most central banks used almost any means necessary to breath life into contracting economies. Many unorthodox steps, collectively know as “quantitative easing”, were taken, but even those failed to have immediate results.  At this point strength of national currencies became a “competitive disadvantage” for some countries. Respective central banks started to talk them down, mostly with threats of intervention. One of them delivered.

Swiss National Bank sold the Franc on open market. Among reasons stated at the time were sharp deterioration in Switzerland’s economy, unacceptable appreciation of CHF and to combat threat of deflation. Of most interest to currency traders was the part about the Franc- SNB singled out EUR-CHF as being at level harmful to Swiss economy. No surprise, really. Country is virtually land locked by Euro Zone and vast majority of its trade is done with Euro partners. While not specified at the time, or even since, 1.5000 level in EUR-CHF was believed to be critical to SNB, a “line in the sand”. This view is prevailing among market participants to this day.

First intervention in March, combined with other measures, resulted in the biggest ever move in EUR-CHF. Cross registered almost 600 pips daily range, certainly great result for central bank. However, it didn’t last and market started to move lower. In June SNB stepped in again, this time causing almost 400 pips swing. This happened just above 1.5000 level, reinforcing general opinion about importance of that number. There was another, smaller move also attributed to intervention, but I was on vacation at that time and didn’t keep notes.

All that took place few months ago, and since many people started to question effectiveness of direct central bank intervention. There is nothing new about about this debate. Some observers always claimed that this step “only slows down the inevitable”, or that “even central bank can’t turn the market”. Strangely, these voices are always heard well after the fact, and not during CB’s actions. Nonetheless, they have some validity now, with EUR-CHF below 1.5000 once again. On the surface, at least.

First of all, in great tradition of central bank secrecy, SNB never stated end goals behind the policy. They didn’t say how long they intended to maintain CHF at specific levels. Maybe it was more of a psychological move in order to calm the markets and send strong message that they are watching things and are ready to take action? Also, it is impossible to tell where the market would have been by now, had the authorities not intervened. For what we know EUR-CHF could be trading at 1.4000 or 1.3500 today. With this unknown and unknowable factor in mind, it is difficult to talk about any “failure”. After all, market stayed above 1.5000 for about 9 months. Objectives and priorities of Swiss National Bank could have changed during this time.

Indeed, this seems to be the case. Those who pay attention to news, and have attention span longer than few days, might remember statement from SNB President Jean- Pierre Roth made just before Thanksgiving. He signaled beginning to withdrawing unconventional measures as the global economy gathers strength. Certainly prolonged intervention is one of those steps, and probably first one to be eliminated. It is very possible that exchange rates are no longer of primary importance, yet many traders are still counting on intervention. This includes even institutions, like Goldman Sachs.

Recent story by Bloomberg reports Goldman Sachs being stopped out of CHF-SEK trade. Apparently this play was recommended to clients at the end of July. This indicates a loss of about 3000 pips. Basically, lack of action by Swiss Nationa Bank is blamed for the outcome. Pretty funny, but it shows that even most sophisticated players can misinterpret intentions of central banks. And these are rarely clear. After all, CB’s are not in business of making money for speculators.

What are the lessons of 2009 for next year? There are still countries not happy about strength of their currencies and hinting direct actions. Canada is one, New Zealand could be another and there is always Japan. Well, we have learned that short term interventions can certainly be effective. They can surely ruin day, week or even a month if holding conflicting position. As far as longer term results, effectiveness is debatable and open to interpretation. It seems that 2010 might bring more of  these drastic steps. Not only by countries mentioned above, but SNB could also resume its campaign. Should be interesting year for currency traders.

Mike K.