The big currency buzz yesterday regarded the possibility that the Swiss National Bank, in a desperate measure to contain the surging Swiss Franc, may do some kind of peg between the Franc and the Euro.
Here’s teh comment from Citi’s FX guru Steve Englander:
There is some early discussion today that the SNB might implement a formal peg of the CHF against the EUR that is meant to prevent CHF’s and CHF has responded by being the worst performing major so far today. The idea would be that the SNB would set the peg and undertake unlimited intervention to maintain it. Unlike the recent moves in money and swap markets this would involve direct buying of EUR, rather than intervention through swaps and money markets. The question is whether the policy should be expected to succeed. In the past the ability of such commitments to work has been determined by investor perceptions of the ability of policymakers to stay the course with respect to such a peg. In the famous case of the ERM, investors sensed that policymakers could not live with the interest rates that were needed to maintain the beg, given that the underlying fundamentals were out of line.
On the surface it is easy to argue that unlimited intervention selling your currency is much easier than the trying to do unlimited intervention buying it. The other side of the argument is that if the concerns about the euro zone do not dissipate, investors may be very happy to make the trade, especially if they set the EURCHF peg at or above current spot. If the amount of buying needed was large relative to the size of the Swiss financial system and economy, investors may lose confidence that they will have the stomach to maintain the pace of buying and take the risk. The Danish peg, which is the most successful in modern times, has had a history of willingness to absorb pain in order to maintain the peg, whereas investors will be far more uncertain about how committed the SNB, given that the peg is tactical rather than structural.