The Swiss National Bank kept rates flat and warned it might sell francs if the franc gets too strong. This represents the central bank equivalent of a father telling his teenage son he'll ground him next time. The franc has not updated its Facebook status to indicate concern.
Currency intervention works until it doesn't. The SNB learned this between 2011 and 2015 when it pegged the franc to the euro, bought every euro anyone would sell them, and then one Thursday morning said f*ck it and unplugged the whole thing. Retail traders who were long EUR/CHF on 100x leverage discovered that their accounts could in fact go negative. Some of them still owe FXCM money. FXCM no longer exists in the United States.
The safe haven franc strengthens during uncertainty. We live in a state of permanent uncertainty. The SNBighting this renewed upward pressure is like a meteorologist highlighting the risk that summer might be warm.
Here is what will happen. The franc will strengthen because something will go wrong somewhere. The SNB will intervene by selling francs and buying foreign currencies. This will expand their balance sheet. The franc will weaken for maybe eleven minutes. Then it will strengthen again because the thing that went wrong is still wrong. The SNB will intervene again. Repeat until the SNB owns every sovereign bond in Europe or until they give up, whichever comes first.
Technical analysts do not care. The 200-day moving average on USD/CHF will continue doing exactly what it was doing before the SNB said anything. Support and resistance levels formed by actual trading will matter more than any central bank press release. The RSI does not read Reuters.
Retail traders will see this headline and think it creates an opportunity. They will fade the franc. The franc will appreciate seventeen percent in three days during the next crisis and their stop losses will get filled forty pips past where they set them because liquidity is a fairy tale we tell children.
Photo by Thiago de Andrade on Unsplash
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