BORIS SCHLOSSBERG<br /><strong>DIRECTOR OF CURRENCY RESEARCH, GFT</strong><br /><br />INTERVENTION is always a subject of controversy and conversation in the currency market. Typically, traders focus on the Bank of Japan (BoJ), which at one time spent nearly $250bn trying to drive down the value of the yen. However, while the BoJ receives the lion’s share of attention, the Swiss National Bank (SNB) has been practising intervention in the currency market much more recently.<br /><br />Since the start of this year, the euro-Swiss franc rate has fallen towards the 1.5000 level three times – and each time the SNB has managed to push the pair higher through intervention and has successfully protected that key barrier in the currency pair.<br /><br />Swiss monetary authorities are greatly concerned about the possibility of deflation and they have good reason to be worried. The latest producer price data has shown contraction for the tenth consecutive month, indicating that pricing power in the Swiss economy remains non-existent. <br /><br /><strong>DEFLATIONARY REGIMES</strong><br />Although central banks spend most of their time fighting inflation, they despise deflation with an equal fervour. Consumer behaviour is extremely difficult to change during deflationary regimes – take Japan for example – as spending contracts and the velocity of money slows to a crawl.<br /><br />The economy could fall into a protracted period of sub-par growth as consumers begin to believe that the currency will be worth more tomorrow than it is today.<br /><br />Despite the SNB’s success so far, I am highly sceptical that intervention will work in the long run. The Swiss franc’s strength against the euro reflects Switzerland’s rock-solid balance sheet.<br /><br />While many European nations are approaching the dangerous level of 100 per cent debt to GDP – with several already beyond that barrier – Switzerland’s debt to GDP is at a very prudent and manageable 45 per cent.<br /><br />It’s little wonder then that as confidence in a global recovery in the second half of 2009 wanes and European budget deficits begin to explode in the wake of increased fiscal spending and a contraction in tax revenues, investors begin to flock to the safety and security of the Swiss franc – a traditional safe haven.<br /><br />Ultimately though, the SNB will not be able to hold the floodgates and the next time the euro-Swiss franc currency pair tests 1.5000, the level may finally give way.<br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary on currencies at www.GFTUK.com/commentary or you can e-mail your questions to them at BorisandKathy@gftuk.com.