Thursday, March 12, 2009

Switzerland Cuts Interest Rates: Swiss Franc To Fall Hard

Switzerland has decided to match the U.S. Central Bank's near zero interest rate policy and as a result the Swiss Franc is set to take a beating. Currency expert Kathy Lien explains the impact of Switzerland's decision on their currency, and even throws out some potentially profitable trades for currency investors in her blog post below:

Switzerland has officially adopted a beggar thy neighbor policy approach by intervening in the currency market. This morning, they cut interest rates by 25bp to 0.25 percent matching U.S. levels. They have officially embarked on Quantitative easing and will be buying domestic and foreign bonds (fully synopsis of SNB rate decision) .

World Central Bank Rates
Source: FX360.com


For currency traders, this means that a BIG seller of Swiss Francs have just entered the market. They have deep pockets and will probably be in the market for a while. Therefore, expect more losses in EUR/CHF and USD/CHF, both of which have hit 2 month highs. Such a strong move begs a correction but ultimately, I believe that EUR/CHF will hit 1.55 and USD/CHF will break 1.20.

The US retail sales report was much stronger than the market expected and this should add to the gains in USD/CHF, which has already outperformed EUR/CHF this morning.

There are still unanswered questions such as how much Swiss Franc the SNB will sell, the scale of bond purchases and additional liquidity. Their announcement today is aimed at accomplishing 2 goals at their expense of their neighbors which is protect their export sector and prevent the economy from falling into a deflation trap.

This post can also be viewed on kathylien.com.

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