1.20 EUR/CHF Floor

There has been market talk (unconfirmed speculation) that 90%-95% of retail forex traders holding a EUR/CHF position are currently long. Coincidentally, those are roughly the same percentage of retail forex traders who can't maintain long term profitability. Yes, I know it's impossible to identify the exact percentage of people blowing money in their parent's basements; but I digress.

While hedge funds and other small speculators are shorting the Swiss Franc against the euro; commercials are long the Franc. Interestingly, the commercials are currently long the franc by roughly the same amount that speculators are short it. As commercials are generally on the right side at major market movements, I've established a small long Franc position (Selling EUR/CHF.) Keep in mind, if you speculate, you are essentially speculating on government intervention. That kind of speculation is extremely risky, because even if your bias is correct, your timing has to be right as well. Rarely do things go exactly as people expect them too. The following are the insights of a former UBS Analyst. 

There are six possibilities for the outcome of the situation that George Dorgan has outlined here: http://georgedorgan.livejournal.com/    

"1. They are planning capital controls, negative interest or similar. We have ruled this out, here. This would not be a night action like the rumor implies.

2. The SNB removes the floor completely and let the franc freely float. Already the OECD suggested the floor is appropriate as long as the Swiss economy has problems, but otherwise it would be simple protectionism.

3. They take the pressure out of the printing press and lower the EUR/CHF to 1.10. This was already implicitly coming via currency reserves as explained here.

4. They take the pressure out of the printing press and to stipulate a floor against a currency basket. For sake of easiness the central bank would prefer a EUR/USD combined floor, e.g. at 1.10/0.90. For us the second biggest possibility.

5. They announce a crawling peg, e.g. 2-3% devaluation per year (along inflation difference) on EUR/CHF allowed.

6. Nothing happens. Just rumors. They just get prepared to print early tomorrow when Swiss GDP comes out. Due to current public opinion and the latest SNB statements, that they defend the 1.20 floor, still the most probable option. 

In these statements, Jordan, however, indicated in several questions that money printing was dangerous because the SNB fears a real estate bubble. To make the franc more expensive at least for foreigners would be a solution, a SNB job."

As the political, social, and economic chaos continues in Europe, the pressure on the SNB's floor is increasing. I think there's a good chance that the floor will be lowered or the franc will be allowed to float freely. Remember, the artificial floor at 1.20 was designed to protect the economy. The unexpectedly good Swiss GDP numbers that came out this morning may give them further cause to consider lowering the floor. Swiss GDP YoY: Previous=2.0%, Forecasted=0.7%, Actual=2.0%.

Michael Weissman



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