Europe Scrambles For Swiss Safety As EURCHF Plummets At Open To All Time Lows
Someone is very, very nervous in Europe as it took precisely zero time for the various CHF crosses to plunge to all time lows. The chart below shows the EURCHF which just opened about 140 pips lower than the Friday close. And while there is little if any movement in the crap currencies, i.e. the USD and the EUR, the flight to fiat safety has never been as profound. Since the CHF is a direct proxy of gold in the commodities space, look for gold to take out $1,600 as early as a few hours from now when the market reopens. Also, expect a possible SNB intervention any minute as the Reuters IFR article below speculates.
SNB's Vice-Chairman Jordan highlighted this week that not only were they "very concerned" but that they were "monitoring the euro franc exchange rate very closely". We now have suggestions that the Swiss would look to impose capital controls in order to limit safe haven inflows and thus CHF strength.
The comments from Jordan at the very least mean that the market will push out the timing of rate hikes and flatten the money market curve further. Under normal circumstances these lower yields would help to take the shine off a currency.
So what are the options? Firstly, capital controls while being in favour in the EM world and endorsed by the IMF as a policy option would likely do more damage than good to the Swiss economy. Its big banks (still too big to fail) have been hurt by the stronger CHF and talk of new round of job losses has already surfaced as a result.
Capital controls for an economy that gains much from its financial sector would not be appropriate. Second, there is the option of negative interest rates. A look at the Swiss interest rates implied by USD/CHF forwards shows that we are already there with regards to negative rates. If one works out the implied rate on the 3-month then we have a rate that is NEGATIVE 1.50-2.50%. So it is debatable whether a policy of officially shifting rates into negative would have any real impact.
This leaves the potential that when the SNB deems the CHF to have increased the risks of deflation we may get more action on 1) either the intervention front or 2) government support for exporters to help compensate for the stronger CHF.
Which is preferred will depend upon whether the SNB can overcome the criticism of its prior aggressive intervention which resulted in record losses last year. The problem with intervention is that the small open economy would be under pressure to meet what is a global demand for CHF and thus would continue to be ineffective. A better option is direct relief to the exporters but at the very least the concerns over CHF strength means that rate hikes from the SNB is still some distance away.
So far the concern that the SNB will do anything is not preventing traders from pushing the EURCHF to the unprecedented border of 1.13 any second. Next up: rumblings of Euro-Swissy parity?
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