Is 105 The New 120? – A Crazy Thought On What Happens Next

The Euro CHF has crossed well over the 1.05 level and looks fairly solid to me. This is a huge bounce from the chaotic levels reached on 1/15 when the SNB floated (low of ~.85). The cross is now 20% off the bottom, and only 15% from where the craziness started.

Step back and look at the post chaos trading and you might conclude that the “market” is trying to reprice the EURCHF to some reasonable level. And that conclusion would be completely wrong. The market is not repricing the CHF – THE SNB IS INTERVENING – What you have as a price today is just a dirty float managed by the SNB.  There is no price discovery  – the FX market is being led by the nose.

I’ve been looking at this picture and trying to figure how this will play out. I see three possible scenarios:

1) For the immediate future (a couple of months maybe?) the SNB will prevail and the trading range for the EURCHF is 1.05 on the bottom and possibly as high as 1.10. The actual rate is up to the SNB. The markets might try to goose the cross up for a bit (the carry trade using short CHF as the “wheel” is compelling).

2) At some point this year the market calls the SNB’s bluff. We get back down to 1.05 and the SNB is forced intodefensive intervention (trying to hold a line in the sand). This, of course, can’t work for long. The SNB has shown it’s hand, the market understands that the SNB is weak and will back off if forced to. This outcome takes us to below par fairly quickly.

3) Something unbelievable happens. Something that is not on anyone’s radar today. Because this outcome is unanticipated it has significant knock-on consequences to global markets. The result is a significant turn around in the Swiss/EU inflation picture. Actual monthly inflation numbers and (more importantly) inflation expectations rise quickly. A huge turn around in the global bond markets follow – lights start turning off all over the place. Gold comes back as a safe haven.

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