I wrote an article several months ago about whether forex intervention works. I am following up with this article as the forex market is probing Swiss National Bank (SNB) resolve to continue intervening to keep EUR/CHF in a range. The SNB's current stated forex policy goal is to keep EUR/CHF in a 1.50-1.53 range. It is attempting to quell speculation that would push the CHF higher vs. he EURO, which is a greater priority than vs. the dollar. This has been an effective policy as EUR/CHF has traded above 1.50 since early March when the Swiss National Bank started to intervene) after trading below 1.50 during the early part of the year. However, the market has come to realize the SNB"s goal is not to push EUR/CHF significantly higher but to prevent it from breaking down to the downside, sort of like a holding pattern. As a rule, central banks rarely have success defending a specific level for a free" floating currency but the SNB has been able to manage a range for some time. Personally, I have learned not to count on central banks to bail out a position but in this case, the market has been more than happy to oblige as trading for SNB intervention has worked well with little risk. There is clearly a law of diminishing returns as the more times a central bank intervenes, the more the market gets used to it and no longer fears a sustained reaction. This is what has happened in EUR/CHF. When the SNB intervenes now, those who have bet on it coming in use it as an opportunity to take profits. Others assume limited follow through and sell into the reaction. This is what happened on Friday (October 30) as the wily SNB (who seems to vary its tactics to keep the market guessing) was reportedly seen on EBS buying USD/CHF as opposed to EUR/CHF. IThere is no way to tell what amounts it bought but we got the sense it was more of a tactic to keep the market off guard than a large scale intervention. There is always a danger that the Swiss National Bank might one day intervene and continue buying EUR/CHF to punish those speculators who are fading the reaction but even then, odds of a sustained reaction are limited as it is not trying to reverse the trend. This brings us to the current situation. The reaction to Friday's intervention is clearly bearish as EUR/CHF gave back all of its post-intervention gains towards the close. If you look at the chart I posted, 1.50 is clearly the line in the sand. What stands out is the 100 day mva is starting to act like a resistance so if the SNB wants to dampen speculation (and it looks at charts), it will want to get the EUR/CHF to trade back above it but that implies a more aggressive intervention stance. Key levels are 1.5075-80 and 1.5015 although 1.50 is more important. Bottom line, there seems to be a lot more risk betting on intervention than anytime since the SNB started this policy in March. We do not live in a free market and I do not know what is in the SNB's mind but it has sort of boxed itself into a corner. If it backs away and attacks from a lower level, the market will become even more immune to its interventions. If it continues to intervene the way it did Friday, it will see even more diminishing returns. If the forex market gets any hint of am easing in SNB resolve, it will go on the offensive. There is always the risk the SNB steps aside and lets EUR/CHF move below 1.50 and then comes in with a massive attack to punish the speculators. This is a dangerous ploy as it would take a lot more resources than it is currently employing. The market is currently questioning SNB resolve to continue its policy so you have to keep an eye out for comments from SNB officials, who have been open in expressing the current fx policy. The SNB is very savvy and knows the consequences of a shift in policy so my gut says it will maintain its current stance for now. However, you cannot rule out a shift in tactics that catches both those betting on intervention at current levels and those who jump in if it allows current support to be broken before the next forex intervention attack. Copyright (c) 2009 Jay Meisler
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