Forex Market Analysis: Mass media, Central Banks and the FX market
What can be said of the Swiss National Bank’s declaration that they will “work hard” to keep the Franc from gaining too much strength against the Euro?
To me, it is not important that the SNB is looking to devalue their currency in order to protect their overall economy, it is what a Central Bank needs to do, it is why they are there.
But what my problem is has more to do with the publicity behind their comments. Philipp Hildebrand, the SNB president, is a veteran political economist who knows deep down what the role of a Central Bank is and how the Forex market works – coming on an interview, announcing a press conference to explain the obvious seems puzzling; unless you look at it from a different perspective.
Prior to the report yesterday in which Hildebrand made his comments, the Franc had been rallying against the Euro and was actually lower on a trend against a variety of other majors.
Yet, a glance at the trading chart from yesterday shows something remarkable, something that continues through today – the Franc began sliding to the Euro and rallying against the others – a full reversal. This can be explained very simply by one word – psychology.
You see, the role of Central Bank is to play around with interest rates, tweak monetary policy to ensure that producer prices are reasonable and that inflation and deflation are kept in check.
But the best tool a Central Banker has at his or her disposal is the media.
Alan Greenspan was a master of this technique, one that is being used today by the US’s Bernanke and most recently Japan’s Fujii.
You see, by making this public, by telling the world that this is what we are going to do, you in effect, negate the need for you to actually do anything – the market will react and your wishes will be fulfilled without having done so much as even thought about how you would accomplish this.
The Franc declined versus the Euro yesterday because traders thought, based on the comments, that the SNB would do something to lower to Franc against a weak Euro – perhaps buy Euro’s in bulk or sell of more Franc’s (keep the presses running) – but as a result of the staged and well rehearsed ambiguous remarks, there is no need for him to do anything. It works every time.
