SNB runs the party for first time

The strengthening of the Swiss franc continued at a much faster pace in 2011. During the summer months of 2011, the rate of the Swiss franc against the euro dropped below 1.1000. That rate was alarming for the SNB. Forex interventions did not work, nor did verbal interventions.

On September 6, 2011, minutes before 9.00 GMT, the SNB published its announcement that the current value of the franc was a threat to the Swiss economy. The SNB subsequently set the floor on the CHF/EUR exchange rate at CHF 1.2000 for EUR 1. The SNB also announced that it was prepared to buy foreign currency in unlimited quantities and defend the floor with the utmost determination.

This safe haven ceased to be. Currency traders saw the rate immediately move from CHF 1.0950 for EUR 1 to CHF 1.2000 for EUR 1. A 9.5% move is pretty wild, given that, on currency markets, anything more than 1% is considered as a sharp move. Several bank traders were caught out with big losses, along with many retail traders. However, with an average margin of around 5%, most of them were able to cover their recorded losses.

Graph – CHF/EUR exchange rate 01.01.2011 to 12.31.2011 (source: European Central Bank)

TradeFloor view:

There was an interesting story behind the main fact that the SNB enforced the floor on the CHF/EUR rate. According to the newspapers, which obtained information from a political opposition party, which in turn obtained information from a source in the SNB, in August, Kashya Hildebrand, the wife of the SNB head, made a CHF 60,000 profit on a currency transaction involving a CHF/USD pair. She had bought the US dollars just a few days before the floor was introduced.

The transaction was reported by Mr. Hildebrand to the compliance department in the SNB. When later asked about the transaction, he argued that his wife had a strong personality. Mrs. Hildebrand had her own art shop and regularly bought US dollars for her company. The timing of this conversion was very lucky and she personally identified a weakness in the US dollar at that time. It is very hard to decide whether Mrs. Hildebrand is generally a skillful currency trader, whether she had a case of pure luck or whether she received some information beforehand.

The independent investigation into this transaction reported that the trade was delicate, but did not breach any SNB guidelines.

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