In a stunning morning shocker, Swiss draw line in the sand to weaken franc
Using some of the strongest language from a central bank in the modern era, the SNB said it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities.
The move immediately knocked about 8 percent off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008 as investors used it as a safe haven from the euro zone’s debt crisis and stock market turmoil.
“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 SNB said in a statement.
“The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
The move was seen as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency. Gold, which hit a record higher earlier on Tuesday, is also seen gaining.
Fears that the world economy may tip back into recession have spurred investors to dump riskier assets such as stocks and seek the relative safety of gold and the franc and yen.
The SNB, which holds its quarterly monetary policy review on September 15, said that even at a rate of 1.20 to the euro, the franc was still high and should continue to weaken over time.
“If the economic outlook and deflationary risks so require, the SNB will take further measures,” it said.
The franc nearly touched parity with the common currency on August 9.
It dived 8.5 percent against the euro after Tuesday’s announcement to 1.203 francs at 6:51 a.m. EDT and dropped almost 8 percent against the dollar to 0.848.
“That was the single largest foreign exchange move I have ever seen,” said World First chief economist Jeremy Cook. “This dwarfs moves seen post Lehman Brothers, 7/7, and other major geopolitical events in the past decade.”
Gold, is Safe Haven, Not Francs
At 1:25 AM today I wrote Gold Hits New High of $1920; Miners Should Follow.
When I wrote that, I had no idea fireworks would hit about 2 hours later. First, take a look at what I said:
It only took 7 sessions to take back a sharp $200 plunge about a week ago.
click on chart for sharper image
In 2008, gold sold off with everything else but treasuries. Miners were crushed. This time I expect gold and miners to do much better in a big market decline, perhaps even rise.
Other Currencies Look Sick
The Euro, the US dollar, the Yen, and the Yuan all look sick for differing reasons. The Eurozone may break apart, Bernanke is likely to double up on QE and the US deficit is out of control, Japan has a horrendous debt problem, and inflation is out of control in china as is China’s infrastructure spending and housing bubble.
The one thing the Euro, the US dollar, the Yen, and the Yuan all have in common is competitive currency debasement by central bankers hoping to increase export to everyone else. Mathematically that is impossible.
Once currency stands out (and it’s not the Swiss Franc). It’s gold.
Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post ListMike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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