Swiss unlimited forex intervention plan opens new round in currency wars

Switzerland opened a new round in the global currency war on 6 Sep 2011 as the Swiss National Bank's decision to cap the Swiss franc for the first time since 1978 marked a bid to protect trade hurt by record currency strength against the euro and dollar. The Swiss central bank said it is "prepared to buy foreign currency in unlimited quantities" to keep the euro above 1.20 francs. The franc plunged a record 8.1% against the euro on the SNB's unilateral move, putting it head-to-head with the $4 trillion-a-day forex market that drove the franc up more than 16% against 9 major peers in the past year.

The move may help stabilize markets by forcing investors to return to riskier assets, said Jim O'Neill, chairman of Goldman Sachs in London. The initiative may leave Norway and Sweden vulnerable to gains in their currencies as countries such as Brazil and Japan fight to limit appreciation amid a flight from the euro debt crisis and near-zero US interest rates. Led by China, all of Asia's 10 biggest economies last year sought to influence their own exchange rates to aid exporters as the dollar fell. HSBC recommended Norway's currency as an alternative after the SNB's action. The krone has strengthened 4.5% against its 9 major peers over the past year.

- This was one big announcement by the Swiss. At one stroke, EUR/CHF jumped from approximately $1.10 to $1.20 and stayed there. That's a gap up of around 10 cents, or in forex trading terms, 1000 pips. In the world of leveraged foreign currency trading, in large enough amounts, profits can be made trading in as little as 1-2 pips, while very good money can be made (or lost) in 10-20 pips. Hence 1000 pips is analogous to a Richter-scale 10.0 earthquake.

So the Swiss have gone nuclear on their own currency. While the exact timing of the announcement might have been a surprise, there had been hints along the way in recent weeks as the Swiss authorities had been openly discussing possible pegs to the euro and such. Investors may wish to take note that when the Japanese kicked off the current phase of the currency wars back in Sep 2010, gold prices had gone up nearly 60% from the $1200 region to over $1900 in the past year. This next round in the currency wars could eventually take prices of gold, commodities and other related assets into literally unchartered territory. Do not expect immediate jumps across asset classes though - we shall see how this plays out over time.

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