The Swiss National Bank Is Big Enough To Maintain The CHF/EUR Rate
By Paulo Santos:It's all over the news and message boards, the skepticism that the SNB can contain the Swiss Franc (FXF) market and enforce its floor against the euro (FXE), now set at EUR/CHF 1.20.The reasoning why the SNB will fail is simple and usually runs along two lines:
- The market is larger than the SNB.
- The Bank of England tried the same with the British Pound (FXB) back in 1992, and ended up failing - this reinforces "the market is larger than" motto.
The reasoning, however, is flawed.
It is flawed, because the present situation is not comparable to Soros breaking the pound. The BoE, back then, was trying to prevent the GBP from devaluing. To do this, the BoE had to buy GBP, which is done by selling other currencies in exchange for it. This exposed the BoE to 2 problems:
- The foreign currency reserves are finite;
- Those attacking
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