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September 6th, 2011 at 5:59 pm

CHF Ceiling Is Not a Peg.

The Swiss National Bank has finally decided to bring out a big gun to its fight over strong Franc. Non only did they conduct a massive intervention, they also drew a line in the sand, pledging “unlimited Euro purchases” if the EUR-CHF drops below 1.20 again. The central bank called it “setting a ceiling” for the CHF (or floor for the most of its pairs). This means, supposedly, that interventions will continue every time the exchange rate between the CHF and the EUR gets under 1.20. What it does not mean is a peg – the Swiss Franc was NOT pegged to the Euro, at least not yet.

If Franc was to be pegged, the SNB would have to shadow all policies of the ECB, something they clearly do not want to commit to. However, if the current action proves futile and over time they are not able to contain the CHF, they might have to do just that. Interestingly, should such time come, the decision should not be too difficult. After all, the Swiss pretty much committed themselves to inflation. With prospects for the Euro bleak, chances are the SNB will have to deliver on its promise time and time again, spending, by some estimates as much as CHF 0.5-1.0 trillion in coming months. Given the small size of Swiss economy, it is a staggering amount of money.

Of course, they could succeed in achieving their goals, too, like in a similar operation in 1978. At that time the Swiss National Bank managed to keep the Franc below 80 francs per 100 Deutsche marks in the two decades through 1998, before inception of the euro by Germany. During that period, Swiss inflation exceeded the SNB’s 2 percent limit in 12 years. At any rate, all this is speculative and will be discussed plenty of times in the future. Today, the EUR-CHF jumped over 1100 pips, the biggest intervention move that I recall.

As mentioned yesterday, I had both a buy and a sell order in the USD-CHF. The buy side of the straddle was filled and my objective of 100 pips was reached easily. Obviously, I had no idea what the SNB was up to, otherwise this trade would be on for much longer… Should not complain, 100 pips is 100 pips, but I’d be lying if said I was not a little disappointed….

For right now I will stay with the theme established yesterday, meaning gold. This market just made a divergence on daily chart, with a possible sell signal on the bearish engulfing line. I went short at 1873, targeting 1800, maybe 1775. Risks are small here. Ideally, I would prefer a longer-term trade with 300-400 dollars objective, but I simply do not see one here. One more thing on the subject of the CHF- charts are distorted now, and markets are jumpy, so I will let the them settle down before making more trading decisions.

Mike K.

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