CHF Devaluation

This morning, the Swiss National Bank took extreme measures to rapidly and powerfully devalue their currency. The SNB has announced a formal base price for the franc vs the euro at 1.20.  They have said they will defend this level with "utmost determination" and that they are willing to buy unlimited amounts of foreign currency.  This is an unprecedented move by the SNB and is certainly the most drastic and acute central bank intervention I've ever seen.

First, lets think about why this intervention happened for those who haven't been following this currency.  The ongoing economic issues in the euro zone and in American have caused investors to seek a save haven from risk in the Swiss franc.  This has caused the USD/CHF to move from 1.00 in Dec. '10 to this year's low of 0.7066, and has caused the EUR/CHF to move down from this years high of 1.3240 all the way down to 1.0067 (the pair was also above the 1.50 mark back towards the end of 2009, so this downtrend has been quite long term).  This puts deflationary pressure on the Swiss economy.  The Swiss economy is highly dependent on exports (they make up about 50% of the nation's GDP), and a strong currency chokes out the profits of exporters.  In general, things cost more for the Swiss people, and the rate at which their currency has rose in the short term is unhealthy for the Swiss economy.

Second, lets think about how this will affect us as traders in the short and medium term.  If the SNB keeps their word, the 1.20 level will act as a stiff bottom to play off of and a great spot for large and small investors to get long at.  In reality, 1.20 is still much lower than we were even 2 years ago, so don't think this level will be attacked in the short term.  No one outside the SNB really knows how long this level will be defended, but some are saying that it may last only up until the October 23 elections.  Nonetheless, this drastic intervention has structurally changed the CHF's outlook.  We've gotten above long-term resistance at 0.8550 in the USD/CHF, so we could start to see some bids in this pair in the short term.  I'm still seeing a 50% fib level on the daily's at about 0.8565 that has held today, so we'll see how the markets react to that level for the rest of today and into tomorrow.

There's no need to rush into any franc trades today.  There will be plenty of opportunities that will present themselves in the next few days as new short term levels are carved out.  I want the market to determine some intraday price levels that I can reference before I start playing off this currency.  I definitely have a long bias right now (I'm in no position to trade against a central bank), but I'm curious to see how this will play out in the midterm.  The Swiss economy is still much better than that of the US and Eurozone, so from a fundamental standpoint, buying francs is still a good play.  The SNB will also have to decide what to do with all the excess euro's they are buying to maintain this rate.  I doubt this will be my only post about this event, but that's all I have for now.  Good luck trading, wait for good opportunities, and keep your risk covered (I realllllllly hope no one was long francs without a stop last night; I can imagine how shitty it would have felt to be woken up by a margin call this morning).