New Swiss Currency Peg

New Swiss Currency Peg
By www.TheForexNittyGritty.com

http://www.theforexnittygritty.com/forex/new-swiss-currency-peg
With the Forex world still licking
its wounds after the Swiss
National Bank removed its
currency peg it appears as
though there will be a new Swiss
currency peg!

CNBC asks in a published article,
if the Swiss have adopted a new
currency peg?

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There is growing speculation that
the Swiss National Bank (SNB)
has set a new target for the
country’s currency, as the Swiss
franc continues to tick lower
against the euro.

Swiss newspaper Schweiz am
Sonntag reported Sunday that
the SNB was aiming to keep the
Swissie trading between 1.05 –
1.10 euros ($1.19 – $1.24), citing
sources with knowledge of the
situation.

It comes after the SNB shocked
markets by dropping its three-
year-old peg of 1.20 Swiss francs
per euro on January 15.

The Swiss franc rose briefly forty
percent versus the Euro when the
central bank announced that it
would no longer maintain a
currency cap in relation to the
Euro.

The franc almost immediately
retreated to the thirty percent
range and has steadily fallen to
where today it stands at twelve
percent higher versus the Euro
than before the cap was
removed.

Now it appears that after a brief
period of allowing the franc to
float unhindered the central bank
is going to resume currency
manipulation.

A Trading Band Instead
of a Cap

Speculation now has it that
the Swiss National Bank will
allow the franc to trade within a
narrow band between 1.05 to
1.10 to the Euro. The bank itself
makes no comment.

Swiss Sunday paper Schweiz am
Sonntag reported the SNB was
now unofficially targeting a
trading band with the euro
between SFr1.05 and SFr1.10,
citing a “well-informed source”.

“We believe that the central bank
will continue to intervene in the
forex markets as it has suggested
in previous statements and,
according to press reports, the
SNB would tolerate losses of up
to SFr10bn,” analysts at Morgan
Stanley said.

The central bank would not
comment but data on Monday
showed that bank deposits with
the central bank rose last week

Adding further fuel to speculation
the SNB has been engineering
the franc lower since January 15.

Interestingly the central bank
increased the value of its franc
holdings by taking off the cap and
now is using those more-valuable
assets to cap the franc again.

For traders the new floating
Swiss currency peg will slide up
and down and may make it
harder for traders to guess where
the bank will intervene next.

Whither Goes the Euro

The Euro is the problem the
Swiss. Two thirds of Swiss
exports go to the Euro Zone.

A too-expensive franc hurts
exports and the Swiss economy.

And a too-high franc threatens
deflation.

The EU is starting a quantitative
easing program to stimulate a
sluggish economy and this
program of printing money will
drive down the value of the Euro.

To the extent that the Swiss want
to maintain a fixed point versus
the Euro they would need to
spend more than they have in
buying Euros to keep the ratio in
check.

This in a nutshell is why they took
off the fixed cap.

The Business Insider writes
about Europe’s QE (quantitative
easing).

In Northern Europe, especially
Germany, the European Central
Bank’s decision to embark on
quantitative easing (QE) has
triggered an avalanche of
indictments.

Judging by the criticism, one
might consider zero inflation a
blessing.

But if that were true, central
banks around the world would
have set it as a target long ago.

Instead, all of them define price
stability as low, stable, but
positive inflation.

That is because zero inflation has
three overwhelmingly negative
consequences.

First, it erodes the effectiveness
of standard monetary policy
(because if interest rates went
much below zero, depositors
would withdraw cash from banks
and put it in safes).

Second, it makes relative wages
(of, say, manufacturing versus
services employees) more rigid,
because wage contracts are
generally set in euro terms.

And, third, it increases the burden
of past debts and makes exiting
from a private or public debt crisis
even more painful.

So, the EU needs quantitative
easing and Switzerland needs to
protect its economy and currency.

Thus there is a new sliding Swiss
currency peg.

New Swiss Currency Peg

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