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John Taylor Is Negative On Gold's Monetary Equivalent: The Swiss Franc
From John Taylor of FX Concepts
The Swiss Franc Should Be Relatively Weak into Late November
EUR/CHF has a dual role as both a carry crossrate as well as a barometer of global risk. During normal times the crossrate reacts to even modest movements in the interest rate differentials between the Eurozone and Switzerland as this exerts a significant impact on capital flows. However, Switzerland’s role as a safe haven will at times take precedent over the relative interest rate movements. Between December of 2009 and June of this year the sovereign debt crisis suppressed the impact of interest rate movements as money flooded into Switzerland and the survival of the single currency was at risk. In April the interest rate differential began to widen in favor of the Eurozone again, but EUR/CHF continued erratically lower into early September. This caused a divergence between the crossrate and interest rate differential that only exerted its influence once the fears in Europe subsided and were replaced by fears of USD weakness. The last time the interest rate differential was at the current level was in April of last year and EUR/CHF was around the 1.5100 area. From this perspective the crossrate should be much higher.
The EUR/CHF role as a risk gauge is mainly focused towards Europe. This is why there is a close relationship between EUR/CHF and the inverse of movements in bond spreads between Bunds and Greek or Irish Bonds. The widest point in both bond spreads was in September and then they started to narrow, which is when euro/Swiss began an upmove. However, spreads have started to widen again and are close to their highs between the 10-year Bunds and Irish Bonds. Although problems in Europe have subsided, these spreads tell us they are far from over. Optimists might say that Ireland is an isolated example and the Irish government is positive as it decided to suspend debt sales for four months in hopes that the problem will pass. If the other credit spreads start to move toward new highs as well then this will trigger a downtrend in the European countries. Our cycles say that this is more likely to begin late in the month.
Trading will be choppy and erratic this week with the US mid-term elections today and the FOMC announcement on QE expected on Wednesday. The cycles call for the dollar to decline into Wednesday and then rally into early next week. We favor buying USD/CHF on weakness and if seen .9850 should be a good place. The cycles then call for the dollar to turn higher and rally into early next week and a break of .9975 signals it will trade to the 1.0050 area early next week before beginning a decline lasting into late November.
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I'm thinking the USD will make a decently large move up tomorrow due to whatever amount the Fed announces being insufficiently large to sustain the current USD position. I'm looking for a settlement in the 83-85 range on the basket index.
Keep on thinking & looking!
Perhaps there has been so much anticipation and speculation that alot of nothing happens.
I'm counting on this as well. UUP Calls, bitches.
I call 72.
Thanks for the post as figuring that USD/CHF had broken under 0.98 a reversal back to 0.9465 was on the cards. Forward contract pending... JT's expertise is tough to ignore...let`s see.
How exactly is the CHF the "monetary equivalent of gold"? I'm pretty sure that the Swiss central bank has been intervening off and on for the past year to stop the rise of their currency. Gold has made no such attempt.
That is, unless you include the issuance of new naked shorts. In which case it is the monetary equivalent of PAPER gold.
Ah for the days when the CHF was still partially backed by gold (that link was severed in 2000).
Euro safety currency of last resort (which does not have an insane short interest)
Sorry, I just hate it when people say that a fiat currency anything like gold. It's like saying a picture of a thing is as good, or better, than the thing itself.
But in the end, the CHF is unlikely to be the final stop on the safety train. That particular line ends at PM station.
cici n'est pas une pipe.
http://www.trenchperspective.com/2009/08/31/this-is-not-a-pipe/
And CHF still has a high percentage of gold backing it at the SNB (20-30%) ... even if not convertible.
The bottom line, however, is that the sheer numbers of Swiss Francs preclude it from being a global reserve currency. There is no way a country with such a small GDP can support the world, unless we were again operating on stone-age technology.
If you count all the gold and other precious items in the vaults of private holders in Switzerland, that may be a different story but that would require state confiscation of all things tangible. I cannot imagine that happening.
Agreed Orly
Maybe CNY currency of last resort...
"Irish government is positive as it decided to suspend debt sales for four months in hopes that the problem will pass" - 4 months to get all your assets out of Ireland
It could be useful to enter into a 4-month hibernation mode after then.
Long term USD grim.
Just takes one prick to pop another bubble.
If you're bullish on gold than you should be the same on CHF. It's a safe heaven currency as there is still around CHF40bn gold on the SNB's balance sheet. The country's budget is well under control and there was even a surplus for 2009. So where will you see inflation!? As the stock market, FX rates will ultimately trade on fundamentals and not on technical FX crap.
Or, the Swiss central bank could print a hundred trillion francs tomorrow and buy Euro.
The fact that they have gold on their balance sheet means nothing. You can't get at that gold with your francs, so why have them? Sure, you can buy gold on the open market, but you could do that with any fiat currency. Indeed, better to go ahead and skip the middleman.
Reminds me of the episode of Family Guy (I think it was Family Guy) where they auctioned off a picture of a luxury yacht, and it went for a million dollars, and then they auctioned off the boat itself. The guy that got stuck with the picture probably wasn't very happy with his purchase.
...but the Gold can be still used to create a new Gold backed curreny if worst comes worst... how does the US create a new currency if there is hyperinflation? A new fiat currency?
Haven yes...that heaven stuff spooks the hell out of me
Swiss Franc went off the Gold Standard in 2010; they were the last defenders.
2000, not 2010. And even then, it was only a partial gold standard, something like 30% backed, IIRC.
If they had been on a gold standard more recently, I would have moved there.
That is what I thought too. It was fully convertible until 2000 (I almost typed 2010 again...must be using that a lot lately) according to wikipedia.
Its not so easy to move there...
...which is another reason to want to move there.
Yes that is a typo...sorry. Oddly your reply prevented me from editing it properly.
2000 not 2010.
Whoops, sorry about that.
There is nothing other than money laundering in Switzerland.Someone puts in their illegal money and voila it becomes legal tender.
This is actually a country which should be boycotted. The so called Swiss neutrality is just protecting themselves and saying their code is Honor amongst thieves
USDCHF to 1.056.
Maybe usdchf to 0.89
It doesn't look likely from here.
While it is possible for the pair to trade down below all-time levels, there are certain qualities about the chart pattern now that make that scenario unlikely:
Below the current extreme levels, who would know if 0.89 were the bottom rung? I just can't wrap my skull around that number right now. It just doesn't make any sense.
But then again, who does?
http://finance.yahoo.com/q?s=USDCHF=X (Nov 3)
http://finance.yahoo.com/q?s=USDJPY=X (Nov 3)
I wonder about your technical explantation about this, especially that USD600bn on QE II is rather in the mid to low end zone
Thanks Orly for the analysis. None of this makes sense. Pre-Fed speak we are at 0.9786
with 30 minutes to go ...place your bets.
0.9718 per close
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