The first breach of the Swiss Franc ceiling


A very interesting day was yesterday. For the first time since established the Swiss franc to euro ceiling (1,20) was tested by markets and even breached for a short moment. The exchange rate reached 1,19995, and provoked a reaction from the Swiss Central Bank (SCB), that returned it back above 1,20.

It is unpredictable how long this semi-currency-board will survive, as the euro is under pressure after it became clear that Spain is de facto defaulted with prime minister Rajoy explaining the situation as "extreme difficult". In fact all possible current scenarios lead to forthcoming devaluation of the euro. In ECB decides to print some more euros to save Spain and Italy then the euro will fall down due to printing. If ECB decides not to print, then the increasing debt problems and uncertainty around indebted governments will press the euro down.

In this situation keeping the 1,20 ceiling is a gift to investors as they will receive for their euros more francs than they really cost. When such gifts appear the markets usually decide to consume endlessly. The more euros you sell to SCB the more profits you make from the difference between market value of the franc and official exchange rate.

SCB can not print francs endlessly. If doing so it will push the euro inflation in Switzerland. ECB has already printed 1 trillion euros increasing its balance sheet by 30%. If SCB is to increase its balance sheet by 30% the inflation will be unavoidable. There are first signs of this as Swiss consumer prices rose 0,6% in March from February. Every such attempt for fixing or semi-fixing the currency to other continuously devaluating currency leads to devaluation of the fixed currency. In past years China printed lots of Yuans to buy with them dollars and keep the value of yuan low for better competitiveness (the same is the purpose of SCB ceiling). And when FED started to print money, this devaluated the yuan too. And injected inflation in China.

So SCB has 2 choices - to print along with ECB and destroy the franc just as euro will be destroyed. The second choice is to cancel the ceiling that will explode the markets freeing the all accumulated by the ceiling tension. It is absolutely possible we see not 1,20 francs per euro, but 1,20 euros per franc.

In fact now with a fixed rate the franc is even more attractive to be kept in portfolios. The franc is a different currency that will survive even if euro disappears. It is a currency of Switzerland - a stable and reliable for long decades country. The euro is the currency of no one. Germany can have its Deutsche mark back, Greece can have its Drachma, Italy can have its Lira. So if the you must decide what to have as cash, it is better to prefer the franc. And in any moment you can convert it to euro at almost fixed exchange rate. Fixed by market forces from one side and the Central Bank from the other. And as the only possible change is from the side of the Bank (in case of cancelling the ceiling) so you do not risk anything. The only that can happen to your francs is to rise. So the artificial non-market weapon of SCB, called "ceiling" in fact motivates the markets to buy more francs... :)))


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