EUR/CHF is up a whopping 300 pips today, touching 1.0160 from as low as 0.9787 in early Asian trading.
Fundamentals mean very little in this pair at the moment and flows are volatile as trades are unwound and the market tries to find a footing. Momentum is king.
It’s impossible to say but the new seller of Swiss francs is the Croatian central bank. On the weekend, parliament there approved a plan to strengthen the Croatian kuna by 18% and peg it to the Swiss franc at 6.39.
This sounds like a disastrous idea as attempting to strengthen a currency is much more difficult than trying to devalue one (and even that proved a bad idea for the Swiss). The central bank openly opposed the move.
The peg, evidently, hasn’t been put in place today by the looks of things, but it sets up an epic front-run on the central bank. Selling into CHF/HRK now at 7.58 and then buying it back at the peg level of 6.39 would deliver a 15% return.
The catalyst for the move was that many consumers took out loans in Swiss francs and they’ve been hit with an extra 20% bill. Similar loans were popular in Hungary, Serbia, Slovenia, Poland and elsewhere.
Overall, something just ‘feels’ wrong about this trade because at first blush, it’s just way too easy.
CHFHRK to be pegged at 6.39
Update: There had to be a catch. The new peg is the loan exchange rate, not the open market rate. So it only would apply to people who had outstanding loans. Now if you were a crooked banker and wanted to get around the rate, the way to do it would be to backdate some loans to before the SNB removed the EUR/CHF floor. Otherwise, there doesn’t seem to be an obvious way to profit from this. We’ll continue to try to track down what’s behind the CHF weakness today; Greg has some technical analysis to go with it.
Update 2: The answer was likely staring at us all along as Swiss sight deposits shot up in data released today, suggesting the SNB may be at work in FX swaps.
