Euro-Swiss and Lessons from the BOJ

The Swiss National Bank revised higher growth and inflation forecasts. Implicitly and explicitly it indicated that deflationary pressures were abating. Those deflationary forces were the justification for the quantitative easing that included large scale sales of the Swiss franc.

The last major central bank to engage is extensive intervention was the BOJ in the late 2003 through early 2004 period. Throughout the intervention, the yen continued to strengthen. The SNB's experience has been eerily similar. The Swiss franc continued to appreciate against the euro.

The SNB's announcement today suggests that intervention is likely over, with the exception perhaps of some smoothing operations. The Japanese experience warns that rather than accelerating the Swiss franc's appreciation against the euro, the end of the intervention strategy (QE) could see the Swiss franc ease against the euro.

Short-term momentum indicators are showing some preliminary bullish divergences. In addition the euro today successfully tested the record low set on June 9th neat CHF1.3734. Today's low, recorded as North Americans responded to the SNB's developments, was CHF1.3741. It is too early to talk about a double bottom. A move above this week's high near CHF1.4040 is needed for that. Nearer term, resistance will likely be encountered in front CHF1.3820 and a move above CHF1.3850 would likely signal a test on the CHF1.4000 area.