There was, naturally, quite a lot of attention on the return of EUR/CHF to 1.20 on Friday, most of if, naturally again, frivolous. Firstly, on a return basis, anyone who didn’t care about mark-to-market would have been back in the black in the mid-1.19s thanks to carry, and secondly, the world is a different place now, compared to January 2015.
I must confess I joined in the frivolity, tweeting that the market may have an issue working through the 1.20005 offer for 20 yards, but it shows how much the event is embedded in the market’s psyche that we are even bothering to comment about it. I don’t recall as much attention on Cable reacquiring a 1.26 handle after the flash crash, for example.
I am no expert but the move back to 1.2000 seems to have some good fundamentals behind it, so there would be no need for the Swiss National Bank to impose an artificial peg again. The European Central Bank is talking actively about exiting its bond buying programme but the SNB is very much set in its easy policy ways – although of course, a positive interest rate differential in favour of the dollar hasn’t done much for that currency recently.
Either way, the reason for this brief note is to ask if such an event as the SNB exit debacle could happen again?
Firstly, I would certainly not rule out the central bank imposing a peg at some stage – the Swiss authorities seem obsessed with a weak franc to almost Asian degrees, so if the Swissy did start strengthening again the SNB could very much be back in the market.
So if we did see another artificial ceiling on the franc, would pressure build up? Absolutely it would, because the market has the smell of blood on such things – only last week, there was heavy activity in the Hong Kong dollar, leading to questions over the peg’s robustness (which have since dissipated).
So we could very easily see a repeat performance when it comes to a peg and subsequent pressure, which suggests that the SNB has not learnt its lesson. That would be a wrong assumption, however (one would hope), because surely if there has been one thing learned by central banks generally over the last couple of years, it is how to exit such a policy.
We may well see a return of a peg (not anytime soon, however), and we may see the central bank defend it with some serious money, but if the pressure gets too much, the exit strategy will be much more subtle. In fact it will be exactly as it should have been in 2015 – pull the bid, put another one five or 10 big figures away and soak up the excess (or even better, do it at the weekend and pick your level!).
The result of such action would be a new valuation for the currency, less long term damage to the reputation of the central bank, and, more importantly, a less-traumatised FX market.