Or, what central bank intervention can do to correlation-based currency models.
Late last week it looked like the Swiss National Bank stepped in to move the Swiss franc lower:
Unsurprisingly some market participants are a touch peeved at this. As is, perhaps more surprisingly, the International Monetary Fund, which last week encouraged the Swiss central bank to return to a free-floating currency regime, and to limit any intervention to “resisting disruptive pressures.”
Here are the currency analysts at BNP Paribas:
EURCHF has come off with the market now guessing at what level the SNB might intervene again. The IMF has criticised the SNB for its aggressive intervention and it may well be [argued] that some of last week’s equity and risk asset sell off was attributable to the SNB’s brutal intervention strategy. Its blunt absorption on EUR liquidity has led to a break of correlations, putting model accounts into deep trouble. Some accounts have reduced trading activities hence the SNB intervention had not only absorbed EUR liquidity it also reduced market liquidity on Friday, leading to temporarily wider spreads. We expect EURCHF to move back to 1.400 where the SNB might step in again. Markets will be watchful. Should the SNB operate in size again market participants will run to the back door trying to avoid getting trapped in a market situation as experienced on Thursday/Friday.
Something else to look out for.
Related links:
Prepare for 10 years of FX ‘super-volatility,’ says UBS – FT Alphaville
Swiss franc intervention cost a billion a day in April - FT Alphaville
A quick guide to ECB intervention – FT Alphaville
Swiss spark talk of euro intervention - FT