Forex Trading: If The Swiss Can Do It, Why Not Us?

When the Swiss National Bank (SNB) intervened in the both the US Dollar / Swissie pair and the Euro / Swissie pair we called it a watershed event that the markets had ignored. Last week we began to hear the rhetoric that we cautioned against.

New Zealand Q1 GDP printed at -2.7% vs. -2.3% estimate Q/Q and Y/Y -1.0% vs. -0.7% estimate. This was the worst GDP print in 15 years which has not been lost on the politicians. The Finance Minister stated the strong New Zealand Dollar was acting like a “handbrake” on the economy. It is this type of rhetoric that usually precedes currency intervention. As we noted, the thinking is, “If the Swiss can do it, why not us?” Furthermore, we remind readers that the Prime Minister of New Zealand is the former head of Global Foreign Exchange trading at Merrill Lynch.

In Japan deflation is the symptom and the prescription is the same as New Zealand and Switzerland. Japanese April CPI was reported at -1.1% at both the headline and core levels. The simple way to combat deflation is to weaken the currency.

The foreign exchange markets can now be divided into those countries that have an incentive to weaken their currency and those countries that either already have weakened or lack the ability. This pits the Eurozone and the US Dollar against the Yen, Swiss Franc and New Zealand dollar.

The US Dollar has already experienced significant weakness over the last several years and quantitative easing has raised the fear of inflation. It is unlikely that the US government would step in to weaken the dollar. Moreover, the global political backlash would be too great.

The Eurozone and the ECB find themselves in a precarious situation. Because of the disparate economic interests in the Eurozone it would be extremely difficult for the ECB to intervene to weaken the Euro. Moreover the ECB has been slow to respond to the global economic meltdown.

Last week the ECB began its campaign to pump liquidity into the financial system by extending 1 year loans at 1% to financial institutions. This is the first and closest form of quantitative easing that the ECB has embarked upon.

The net result is the Euro remains vulnerable to competitive currency devaluations. We remain long EURUSD with a short term bias and an initial target of 1.42. In Euro ETF (FXE) terms this translates into $142 initial target.

Disclosure: Long FXE

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