Brave New World

The beginning of a currency war? 12/03/2009

The rules of the game have suddenly changed. In one fell swoop the Swiss National Bank has introduced by far the most aggressive monetary easing since the crisis began in 2007. In addition to cutting interest rates by the expected 0.25% the SNB announced quantitative measures as well as direct intervention in the FX market to weaken the CHF. Direct intervention, in the form of buying EURCHF, took place at the time of the announcement; pushing the pair up 400pips from 1.48 to 1.52 in a matter of minutes. Prior to today’s announcement the CHF was approaching the record high of 1.43 it set against the EUR in October. The intervention is a direct an effective measure to prevent any further appreciation against the EUR. 

It is a pretty significant event and represents a new phase in the economic crisis. The last direct intervention in the FX markets from a major economy was six years ago. Until today central bankers had a tacit agreement in place not to enter into a competitive devaluation race. Even though some European politicians argued that the UK government was talking down sterling, the rate was still determined by the market. The SNB move now paves the way for other countries, particularly those whose economies rely on exports to devalue their currencies. In particular, it could pave the way for the Bank of Japan to address the overvalued JPY and put further pressure on the ECB to add to quantitative easing. Any series of competitive devaluations is likely to boost the dollar. The other big winner is gold, which rose 16% yesterday on the back the news from Switzerland.