Do you remember when the Swiss National Bank (SNB) came out with a declaration that it would no longer tolerate EUR/CHF trading below 1.20? That was back in September. That announcement saw the cross rate move up above 1.2400 by October after having been down near the parity level in August, as you can see in the chart below. It's worth noting from a technical analysis perspective how the market stalled out near the early 2010 lows, but that's a side discussion at this point.
What we've seen in the last few weeks is EUR/GBP dipping down below the range it has been in since the SNB made its intentions known. In other words, the cross is now getting to the point where the resolve of the central bank may be tested.
No doubt, some market participants had expected to see the 1.20 floor tested well before now. Challenging the SNB was a discussion point as soon as the floor was announced. That never really happened at the time, though, because the move was timed pretty well. It came when the market was already in rebound mode. The Japanese did the same sort of thing back when USD/JPY was making its first foray below 100 in the 1990s. They didn't fight the move too hard on the way down, but really kicked it in the tail when the selling was seen to have abated and as a result really pushed the market back up.
The issue for the SNB, though, is the euro. No longer are we talking constantly about the franc being a safe haven currency attracting loads of attention as was the case earlier. Now it's just a function of a weak EUR, which we can see in EUR/USD, EUR/GBP and EUR/JPY as well. In other words, it's not the same kind of speculative froth as was the case in EUR/CHF back in the summer. That could make things a bit more challenging for the SNB in defending the floor.
In theory, the SNB has unlimited funds available to it. All the central bank need do to support the 1.20 floor for EUR/CHF is to print as many francs as required with to buy all the euros necessary to support the rate. At some point, however, inflationary concerns will start to become an issue. That would tend to put upward pressure on Swiss interest rates, which would only further support the franc, especially in a situation where the ECB is tilted toward an easing policy.
Now that we're getting close to 1.20, I wouldn't be surprised at all to see the market give that level a run just to see how aggressive the SNB really is going to be in defending it. My guess is the initial defense will be quite stout. It will be more a question of follow-through under sustained attack.
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