Tuesday, September 6, 2011

The SNB drops a bomb

     The Swiss National Bank dropped a bomb on the currency markets today.   They unilaterally decided to peg their currencies value to 1.2x that of the euro by buying "unlimited" amounts of other currencies.

     "The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities," said the Swiss National Bank in a statement.

    The Swiss franc had been rallying recently on it's safe haven status as it is one of the few currencies backed by gold.  However, the franc's rise was killing the Swiss economy as it made their products more expensive abroad. 

     "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development."

     The Swiss franc immediately dropped 8% on the news.  Here is a chart of the swiss currency.
                  As you can see, the franc dropped from 126 yesterday to 116 today falling 8.5%.

     This illustrates the "race to the bottom" for currencies when central banks try to interfere in markets to devaluate their countries currency.  Every country wants an export edge and so wants their currency weaker so they can sell more products abroad and strengthen their economy.  This is why Germany likes being in the Euro.  The Euro is artificially weak because of weaker peripheral economies and this aids Germany's exports.  This weak Euro has helped turn the German economy into an export powerhouse.  Same with Japan.  Japan needs a weak yen to make their products more appealing abroad.  Look for the Japanese to do something similar to the Swiss in the near future as their currency has climbed a lot due to its safe haven status as well.  

     With everyone racing to weaken their currency, it makes more sense than ever to hold some gold.  Paper is getting less and less valuable and central banks can't print Gold.  The Swiss franc is no longer a safe haven in these dramatic times so I am looking for gold to go higher, perhaps much higher.  

     With no internet today, I was unable to watch the markets today.  However from looking at the charts, today's action was quite bullish for the near term.  We opened down big and fell to almost 300 pts down on the DJIA but rallied back throughout the rest of the day finishing down only 100 pts.    
     Gold, after hitting an all time high at 1923 in overnight trading had a huge reversal finishing around 1870.  This makes little sense to me as the elimination of the safe haven status of the Swiss franc should have increased the appeal of something like Gold.  I will have to investigate the reasons for this action further.  

      Needless to say, I made no moves today with my internet being on the fritz.  I am still long Gold and plan to stay that way.  AAPL looked real strong today in a weak tape finishing up 1.5%.  If this market keeps rallying, I will buy some of my AAPL back.  

     Tomorrow we get big news out of Germany where the courts there are ruling on the legality of the German participation in the European Financial Stability Facility or EFSF for short.  It's likely that the court rules that German participation is legal because if they don't all hell is going to break loose.  This should be a big market mover one way or another. 


  1. I heard about this and am worried about the effect this will have.

  2. Maybe I should have taken gold more seriously... Hmm...

  3. sucks when the internets down, you could have made some money with this nice rally

  4. i hate when tht happens