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Central Bank "Speak" - Beware the Subtleties
The Swiss National Bank changed their policy on currency intervention
in their 10 December communiqué. (released 12.12) The language changed
as follows:
17 September Statement:
The SNB will act decisively to prevent any appreciation of the Swiss franc against the Euro.
10 December Statement:
The SNB will act decisively to prevent any excessive appreciation of the Swiss franc against the Euro.
I love it when they do this. It ‘s all so subtle. The impact caused
quite a jolt in FX markets. On a relative basis the CHF/EURO has moved
quite a bit in a short period of time (2%). These are the ways of the
Central banks. They change a word or two and create an immediate
economic impact. Those impacts can be far reaching. It is the nature of
things today. The Central Banks can move markets and change economic
policy with the insertion of a single word. That is power. There are
almost no checks and balances to this power.
You might say, “Who cares about a few ‘big figures’ in the Euro/CHF rate”.
I can assure you that a number of folks made an absolute bundle out of
this. On the other hand, there are thousands of credit card borrowers
in Eastern Europe who are a 'little poorer' as a result.
I like to speculate on the ‘Whys’ of these important decisions.
Unfortunately, CB’s do not give us a lot of insight into their
thinking. I would offer up a few possible scenarios on how this came
about. You decide which one is correct.
A) The SNB arrived at this policy decision without input or
pressure from any exterior sources. It was simply time to reduce one of
the ‘extraordinary measures’ undertaken during the ‘crisis’.
B) The SNB realized that the six month experiment with currency
intervention was not achieving much for the domestic economy and they
were taking increasing pressure from the other EU Central banks on
their policy of “beggar my neighbor” through the cheap currency policy.
C) On or about December 10 the SNB saw the handwriting on the
wall and moved to change policy. They saw the gathering forces of the
Sovereign Risk issue (Greece) emerging and realized that Euro weakness
was a likely short-term result. In that environment they knew that to
continue to defend the 1.51 Euro/CHF parity in the FX markets was going
to force them to substantially increase their market intervention. This
would prove costly, both in terms of actual losses on their Euro
holdings and at the significant cost of increasing the money supply.
They chose to back off rather than fight.
In my opinion the decision had nothing to do with A. This change in
policy was driven by a combination of B and C. On December 10 (two days
before the SNB announced their move) I quoted a Greek citizen in the shipping business as saying this of the Swiss dirty float currency policy:
"If Greece had its own currency it could adjust it to
achieve a trade advantage that would address the fundamental
imbalances. If it works for the Swiss, then Greece should do it too!"
While I doubt the SNB was reading my blog, I am sure that they heard
this sentiment from many other European financial officials. The change
in currency policy was a result of external pressures. It had little to
do with the domestic Swiss economy.
This is a small example of decision making at the Central Bank level.
Nothing is as clear as it would seem to be. Everything is connected.
Policy choices reflect a ‘gun to the head’ mentality versus a well
thought out strategy. The Central banks are trying to manage the
short-term. They may be able to influence the short-term, but they
remain slaves to the long-term forces.
************
In 2010 the major CB’s will be coming forward with an endless stream
of market moving information. Across the globe there are steps being
made to reverse the ‘emergency measures’ that were undertaken in 2008.
Center stage on this is the Fed. Mr. Bernanke is piloting a tanker
filled with $2 trillion of highly flammable liquid. He not only has to
slow this ship down he has to put it in reverse. And he has said that
he will do that in less than one year. A soft landing appears difficult
to achieve.
The Fed’s most recent purchase of Agency bonds was a measly $9 billion.
Down from $25 billion a few months ago. The QE program is ending.
Slowly, but ending. It is no coincidence that the 10-year closed the
year at a 3.85 yield and the price looking soft.
Mr. Bernanke and the NY Fed have been experimenting with a few
techniques on how to unwind all this. Nothing like this has ever been tried
before. They have indicated that they have it all figured out. I’m not
so sanguine. We shall see.
There is going to be a lot of loud and overt announcements from the
Fed in 2010. Things like reverse repos and increases in deposit rates
for free reserves. Each announcement will move markets. We’re also
going to get a ton of the ‘subtle’ stuff. It’s the subtle stuff that
worries me. That will move markets too. It should be a great year for
the blogs. Happy New Year.
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I really like what you can do with a paint brush tool tip and instert font tooltip!!! Picture may be worth a 1000 words but a picture withe right words is priceless.
"THIS MOVE MADE SOMEONE A FEW HUNDRED MILLION!!"
I admit: It was me.
very nice piece, Bruce. actual trader logic / thought process / reasoning.
and thanks for picking up on the fact that CBs etc. are simply hostage to mr. mkt's direction / whim and that they, the CBs etc., intimately understand how to take credit for earthquakes by running to the podium as soon as one strikes.
Fed ending agency/MBS purchases in March is the perception they have been building and it has been baked into the market expectation.
What happens when they "surprise" by extending the agency and MBS monetization?
They surely realize they are the market at current prices since Bill Gross has been selling. When the Fed bid disappears unless Fannie and Freddie are next in line to provide the high priced bid the probability that mortgage rates tick up further and knock whatever air is remaining in the housing market rises dramatically. And in an election year?
Every word you say is true. I am very afraid that you might be correct. That would be a nuclear option in my view. But it could go down like that.
That would fall into the 'overt' catagory. There would be nothing 'subtle' about it. If Mr. Bernanke were to try to do that it would seal the fate of fiat money for a decade or two.
The addition of the single word "excessive" is going to have a lot of Polish homeowners gagging on their kielbasa, wishing they hadn't funded in the Swissie.
Not really an adverse affect... the PLN moves almost adversely with the pair mentioned in this article.
I think that's more likely goulash and whatever they eat in Croatia than kielbasa, but point well taken. On the other hand, Swiss banks "in debt" to E. European households can't be making the cheese eaters very happy either.
@Bruce Krasting
Are you so sure about that? Do you have any thoughts on Sprott's QuEasyGate hypothesis?
gulp, "Sprott's hypothesis" is anything but original, unique or timely.
to keep it very simple: PPT ~ Executive Order 12631.
@ ChopShop
Sprott's hypothesis is, at best, tangential to the PPT idea. It is common knowledge that the FBR manages (or manipulates, if you prefer) the bond market through the FOMC. Sprott did not focus on equities, which is what the PPT hypothesis covers. Sprott's analysis was concerned with the bond market. To my knowledge, Sprott is the first and only group to identify the possible covert quantitative easing of the FBR and a possible cover-up of this covert activity by labeling the purchases as "Household Sector" in the Flow of Funds report. Do you have an opinion on that analysis?
Just look at what happened to the Yen once it broke to new 14-yr. highs and the Japanese Plutocrats immediately made of public statement that they would be intervening to reverse the Yen's path.
The USD/Yen has gone completely vertical ever since.
Those guys must be high fiving in the Opium Den, getting ready to head over to the Hostess Bar.
Trashing your currency has now become a national badge of honor.
"It’s the subtle stuff that worries me."
- I couldn't agree more.
Great work.
My opinion, for what it is worth, is the Swiss, being Swiss realized they needed to change the statement because it was technically correct. The old statement implies that the CHF is pegged to the Euro, which it is not, as it is free floating. All along, their policy has been to prevent excessive appreciation vs the Euro, they just rephrased the statement to be more accurate.
But, I agree that the way the fx markets respond to such changes is always astounding, but then I am always amazed at the way fx market makers never look more than a few hours into the future.
Thank you Bruce...great stuff.
A little Freudian slip in this one perhaps??? "Mr. Bernanke and the NY Fed have been experimenting with a few techniques on how to unwind all this. Nothing like has ever been tried before. They have indicted that they have it all figured out..."
Ah! I think this is not a freudian issue. My young copy editor has a serious drinking problem. A beating is in order.
Thanks for pointing this out.
bk
actually, I was thinking along the lines that perhaps I might see a day where Mr. Cuomo or a US Attorney procures an indictment on Bernanke. I'm hoping the BACML/SEC case in Judge Rakoff's court opens the floodgates.