WARNING - EUR/CHF in Intervention Territory

The foreign exchange market is fairly quiet this morning with no U.S. economic data on the calendar. All of the action happened overnight in EUR/CHF which broke the 1.50 handle during the Asian trading session. The violent sell-off in the currency pair is indicative of all the stop orders that were sitting below 1.50. Once that price level was broken, EUR/CHF plunged 100 pips in 5 minutes. Since then the currency pair has hung below 1.50, with the Swiss National Bank no where in sight.

EUR/CHF in Intervention Territory

EUR/CHF is currently trading in intervention territory. Although the Swiss National Bank has threatened to intervene throughout the year, there has only been two to three clear cases of intervention in March and June. The first bout of intervention occured when EUR/CHF traded around 1.48 and the next two were in the neighborhood of 1.50, setting this price level as the line in the sand for the SNB. Each time, the central bank intervention triggered to sell francs, they triggered a parabolic move in both EUR/CHF and USD/CHF.

SNB Pledges Continued Intervention

When the Swiss National Bank met earlier this month, they pledged to continue to fight "any excessive appreciation of the Swiss franc against the euro." In other words, they could come into market and sell Swiss Francs at anytime. Yet even though the risk of intervention by the SNB has escalated significantly by the breakdown in EUR/CHF, it is important to realize that the Swiss economy has stabilized since March and June with GDP growth turning positive in the third quarter. Inflationary pressures are also beginning to sneak up on the SNB, which may encourage them to be more cautious about intervention in an attempt to avoid the inflationary conditions that stemmed from currency pegging in the late 1970s. Nonetheless, we think the SNB is only waiting for more speculators to short EUR/CHF before intervening to get the most bang for the buck, a tactic often used by the Japanese.

Why Currency Traders are Paranoid about Intervention

The reason why currency traders are paranoid about intervention is because of the potential volatility in the Swiss Franc. The following charts illustrate the parabolic moves in both EUR/CHF and USD/CHF whenever the SNB intervenes. Traders don't want to be caught short during this time as the scope of the rallies can range anywhere from 200 to 600 pips.

June 24 EUR/CHF

June 24 USD/CHF 

June 18 EUR/CHF 

March 12 EUR/CHF