Today’s Spotlight Market? -? Thursday?s move by the Swiss National Bank to remove the ?cap? at 1.20 on the EUR/CHF brings back memories of another historic action by a Central Bank, the historic ?Black Wednesday? in 1992 when the Bank of England (BOE) withdrew from the European Exchange Rate Mechanism (ERM). Here the BOE was attempting to support the value of the British Pound (GBP) despite a low interest rate and high inflationary environment in Great Britain. The BOE had a desire at the time to keep the currency at a rate of no lower than 2.7 German Marks per British Pound.? However, not even a massive hike in interest rates could keep speculators from trying to sell the Pound short as the value was ?inflated? due to BOE actions to support the currency. Finally on September 16, 1992, the BOE withdrew from the ERM and let the value of the Pound find its equilibrium based on market forces. In the span of just 3 months from September 1992 to December 1992, the value of the Pound vs. the U.S. Dollar fell from around 2.0000 to 1.5000, marking a major top for the GBP that has not been tested since. That is your history lesson for today.
Fundamentals? – ?Currency traders experienced a major surprise on Thursday, courtesy of the Swiss National Bank SNB, as it announced it was ending the cap that kept the Euro/Swiss (EUR/CHF) cross from moving below 1.20 franc per euro. In addition, the SNB also announced it was lowering the interest rate on sight deposits over a certain amount to a negative 0.75% from negative 0.25%. This move appears to have been totally unexpected by traders as earlier this week, SNB Vice President Jean?Pierre Danthine, spoke during an interview on a Swiss network, the cap was a ?pillar of the monetary policy?.
The price movements were historic with the EUR/CHF futures plunging over 2000 ticks at its worst level. Just to put this into perspective, a move of 100 ticks is considered a large price move. The timing of the move is interesting as the SNB acted about 1 week before the European Central Bank?s (ECB) expected announcement about a movement towards quantitative easing. Any moves by the ECB to try to stem potential deflation could trigger additional funds being moved to the Swiss Franc which would put even greater pressure on the SNB in trying to hold back the Franc from rising even further.
During the 3 years the ?cap? was in place, the SNB was buying Euro?s and selling Franc?s in order to prevent the EUR/CHF cross from moving below 1.20. The Euro?s held by the SNB have fallen in value, with potentially billions in losses already being realized on the banks Euro holdings. So it appears that with the potential for a QE for the Eurozone, the SNB has finally cried ?uncle? and let the value of the Franc reach its ?fair? value based on market forces.?? ?
Technical Notes? -? View Today’s Chart
Looking at the daily continuation chart for the Swiss Franc futures, there really is very little to say and just let the picture tell the story about how the market was caught off-guard by the SNB move. Now that the Swiss Central Bank is allowing the Franc to move based on market forces, one has to look towards the August 2011 high, above 1.4100 as the next major resistance level for the currency. Below this lofty level, we see some chart resistance at the 1.3000 level, which was the most recent major high that was made back in September 2011. Support is very difficult to ascertain given current market volatility, but we can look towards the 200-day moving average which is currently hovering near the 1.0800 price level, as a potential support area being watched by technical traders.
—————————————————————————————————
This article is provided for informational purposes only. No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment advice. The content provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness. optionsXpress makes every effort to provide timely information to its recipients but cannot guarantee specific delivery times due to factors beyond our control. Derivatives involve substantial risk and are not appropriate for all investors. Please read the?“Disclosure Statement for Futures and Options”?prior to investing in futures or options. For investments using a straddle or strangle options strategy the potential loss is unlimited. Multi-leg option strategies are subject to multiple commissions. Profits may be eroded by the commission expended to open and close the positions and?other risks?apply.