Once again Swiss officials failed to dissuade the market, allowing for a massive gain in the Swiss franc on August 31st.  Against both the euro and US dollar, the Swiss currency appreciated by over 2% on the session.  Previously trading around the 0.8200 exchange rate, the USDCHF fell a little over 200 pips to 0.7994 before rebounding a bit.  So, why the sudden change in market sentiment?

Source: FXAlliance Charts

Following three tumultuous weeks of intervention, restrictive policy jawboning and a threat of a euro peg, Swiss central bankers decided to stay on the sidelines for the moment – hoping that the currency was going to weaken further on their recent efforts.  Since speculation shifted on the likelihood of aggressive intervention by the Swiss National Bank, the Swiss franc has weakened by almost 14% against the US dollar.  But, now it seems that traders are aggressively calling the SNB’s bluff.

The situation becomes even trickier with today’s announcement that the government plans to earmark about $1.1 billion (870 francs) in funds to support the broader Swiss economy.  Although most of the money will be allocated to both tourism and export sectors, government officials are hoping that the package will trickle through to other parts of the country – softening the blow of a rising currency.

It isn’t the fact that Swiss officials failed to be more aggressive with this stimulus announcement – threatening once again to stem the currency’s appreciation.  It wouldn’t have worked anyways.  Instead, traders are banking on further Swiss franc appreciation on the fact that the government is conceding to the reality of “massive overvaluation” in the currency.  During a briefing, the country’s economic minster Johann Schneider-Ammann stated that Swiss citizens “will probably have to live with the strong franc for a longer period of time.”

With Swiss officials conceding victory to the market, it’s no surprise that the ruling coalition decided to half the original amount of funds dedicated for the package.  Policymakers were actually set to release about $2.5 billion in funds to alleviate the country’s economic pains.  Instead, government officials decided to offer a little less than half – likely having plans for the additional funds for a later date.

All in all, both outcomes fail to show any conviction on the part of Swiss government officials – both SNB and the head administration.  Without any real plans to influence the country’s exchange rates, central bankers are likely to remain on the sidelines licking their wounds for the remainder of the year.  So, expect the Swiss franc to continue to appreciate against the greenback.

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