So Switzerland did something interesting (part 1)

I went to a public lecture at LSE earlier this week. I didn't want to go initially, but thankfully I was convinced to go.  It was really informative and interesting and it's something I want now want to do more regularly, so thanks to the person that made me go! (You know who you are).

The Speaker was Heiner Flassbeck, who wikipedia tells me was once the State Secretary in Germany's Federal Ministry of Finance. Mr. Flassbeck is also the Chief Economist at the United Nations Organization for Trade and Development, so this guy knows his stuff!

The topic for the lecture was 'Policies for Inclusive and Balanced growth'. Having done a degree in Economics with Politics, I was happy I was able to understand pretty much all of what Mr Flassbeck discussed.

Without going into everything included in the 90 minute lecture, two things happened during the that stuck with me.

Firstly - during the question and answer section, one of the guests at the lecture burped into his microphone when he was asking a question, and then carried on as if nothing happened. This was in a room full of about 300 people. My companion and I were trying so hard not to laugh out loud that we both began to sweat.

Secondly - Mr. Flassbeck very briefly mentioned something quite brave that the Swiss Central Bank have done, which had relevance to my Forex trading. It's also the main focus of today's slightly longer blog entry.

About a year ago, the Swiss Central Bank announced plans to peg it's currency (CHF) to the Euro (EUR), as it was overvalued. Let's say a 'normal' exchange rate for Euro to Swiss Franc is 1 Euro to 1.2 Swiss Francs - which is  (EUR:CHF 1.20). If the Franc then strengthened with respect to the Euro, and became 1.1, then 1 Euro can now buy less Swiss Francs than before.

Conversely, this means that those exporting goods in Switzerland will now lose out, as those holding Euros will spend less on Swiss goods, as they have become more expensive. It also impacts the tourism industry as people will not want to go to Switzerland if the Franc is expensive.

The Swiss Bank's plan was to purchase a lot of Euros to bring EUR:CHF up to 1.2 again. Whenever the price threatened to fall below this, Euros would be purchased so that the exchange rate 'floor' was at 1.2.

The ramifications for this gave a unique opportunity for Forex traders to make consistent profits, with small risk. It involves a trading method known as 'scalping'. This will be explained in part 2 of this blog, which I have separated for those who have knowledge of the Forex trading.

Thanks for reading,

Jr

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