Monday, January 19, 2015

No More Peg

Just 3 years ago, the Swiss National Bank imposed a currency floor for the Swiss franc. The main job for the floor was to prevent the franc from appreciating too much against the Euro.

A few days ago, the Swiss shocked the world by abandoning the franc's exchange rate floor of 1.20 francs to the euro. The decision caused chaos in the currency markets as the Swiss franc went up almost 20% before coming down slightly.

The main reason the Swiss raised the white flag is because the European Central Bank (ECB) is expected to implant a massive sovereign bond-buying program that will flood the market with euros. Knowing this, the Swiss jumped before they were pushed and abandoned the peg.

This was a smart move by the Swiss and Switzerland may be just the first country to do this. Remember the Asian crisis when Thailand was forced to abandon their peg to the U.S dollar? Well, Asian countries like South Korea and Taiwan are on the frontlines now as a strong fall in the Japanese yen is causing the exports of these countries to suffer. This is on top of China who had always devalued the Chinese yuan.

With the ECB now jumping on the bandwagon, the euro will now go down as well leaving the U.S the last one standing. So 2 things are clear; 1) buy U.S dollars because the safest currency in the world is just going to get stronger and 2) the European Union and its single currency are going to the toilet.

1 comment:

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