Foreign Exchange Insight : Market Rumours That Switzerland Will Peg the CHF to the EUR See the Franc Suffer Record Daily Losses

August 12, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Insight : Market Rumours That Switzerland Will Peg the CHF to the EUR See the Franc Suffer Record Daily Losses

The Pound Euro exchange rate (GBP EUR) is 1.1417. The Pound Dollar exchange rate (GBP USD) is 1.6201. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5749.

As a hectic week draws to a close, some order appears to be returning to global markets. Asian shares made moderate gains overnight; a stark contrast to the early part of the week, which saw the Hong Kong and Tokyo stock markets lurch dramatically, suffering huge losses followed by buying sprees.

An element of calm also appears to have been restored in the currency markets, with even the high-yeilders trading in relatively stable ranges over the past 24 hours. The one exception to this rule has been the Swiss Franc which suffered a record one-day fall against the US Dollar and Euro yesterday.

At one point during yesterday’s European session, the GBP CHF rate was trading almost 10c above Tuesday’s record low at 1.2450. This dramatic reversal was largely driven by threats by the Swiss National Bank to accelerate its policy of actively weakening the Franc by releasing reserves onto the market. Investors were further spooked by a newspaper article in which SNB Vice Chairman Thomas Jordan failed to dismiss the possibility of the Franc being pegged to the Euro in order to protect it from further strengthening.

The Swiss authorities could hardly have chosen a more troubled currency than the Euro to hitch their ultra-strong Franc to, if indeed they do opt to take this route. Market whispers persist that several major Eurozone retail banks have severe balance sheet problems, the most prominent amongst these being France’s Societe Generale. These rumours forced France, Italy, Spain and Belgium to follow Greece’s lead in banning speculative short-selling of bank shares yesterday, a move which is likely to fuel further rumour-mongering.

At the moment, Europe’s single currency is managing to avoid heavy selling pressure in the markets, as investors concentrate on its relative yield advantage against the Pound and the Dollar. However, if speculation that major Eurozone retail banks are in trouble intensifies and with the sovereign debt problems of several ’peripheral’ European states showing signs of spreading, a downward move for the Euro, leading to a test of the 5-month high of 1.1612 on GBP EUR, can not be ruled out.


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