Let’s suppose you’re running the central bank of a tiny land-locked country in the middle of the Alps.
Your currency is abnormally strong because investors feel more comfortable parking their cash in your safe-but-boring burg instead of in the imperiled common currency zone that surrounds you.
The currency of the imperiled currency zone experiences a broad-based rally amid heavily oversold conditions. You should be relieved, no?
Damn, turns out the broad-based rally did not include you…Now the pressure is on.
If the common currency hits turbulence again, what can you do to protect the exporters of your tiny alpine country. You’ve vowed to buy unlimited amounts of foreign currencies to keep your currency reasonably competitive. But with that strategy comes unlimited amounts of risk.
So, the SNB has two choices. Live up to their word and defend 1.2000 with massive amounts of printed Swiss, a strategy which they tried before at around the 1.5000 level with disastrous results. Or they can resort to a strategy not used since the 1980s, negative interest rates, though there is heavy opposition to that strategy from a political standpoint. ‘
Kinda stuck between a rock and a hard place….
Expect the SNB to defend 1.2000 for a time but you can forget the 1.3000/1.4000 talk we heard just a few weeks ago. They have their hands full already…
