the Neue Zuricher Zeitung, May 8, 2010:
“We will not allow that the euro zone problems and an
excessive rise in the franc to lead to deflation in Switzerland. That
defines our policy with regards to the exchange rate. The bank will act in a decisive manner if
needed.”
There has been a lot of speculation in the past 48 hours on who did what
in the FX markets as far as intervention is concerned. The Treasury
Department has a “no comment”. The ECB and the SNB have been mum. I will
stick my neck out and say it was the Swiss that did it. A two-day chart
of Euro/CHF:
The two vertical lines are evidence of market intervention. That is not
just short covering. This was a size buyer that did not care if the
execution was sloppy. It looks to me like an effort at “shock and
awe”. Some thoughts:
-As of 3/31/2010 the SNB had Euro 53b in reserves. They reported that
these holdings had a mark to market loss for the Q of CHF3.1b ($2.9b).
The NZZ has reported that SNB purchased an additional Euro10b in April.
It should therefore come as no surprise that the SNB bought more Euros
and sold more CHF in the past day and a half.
-The graph shows that the FX rate was just a tad above 1.40 for a few
days prior to the blow up. I suspect that this was the SNB providing
support to the market on an ongoing basis. These are stabilizing
efforts. It is a “containment" policy it is not “shock and awe”.
-The night of the Merkel “no trading” rules the Euro/$ hit a new low.
Logically there would have been pressure on the Euro/CHF. But it held.
Here I suspect that “resting orders” were in place to continue the
containment.
-Watching the market on Wednesday I concluded that there were three
separate rounds of intervention in the E/CHF. Each resulted in a spike
in the rate and then a resumption of trading. The end result was a 2%
backup. That is a big move in this cross. This activity all took place
during peak European and NY FX markets. At that time there are thousands
of players. The market is deep and big numbers can get done. The
intervention required to move the market this much would have to be more
than Euro 5b.
-The E/CHF rate was fairly quite today. Until 2 pm. Then another demand
driven gap upward. I saw no reason in the other markets for this gap. If
a “real” market player wanted/needed to buy size E/CHF they would not
have done it a half-hour before the futures close. This stinks of “Shock
and Awe”.
-The E/CHF market is a derivative of the $/Euro and $/CHF. To unwind
demand for E/CHF one could buy $/CHF and sell $/Euro. The crosses have
to match out with the cash prices. During European trading the CHF
crosses all have big floats. But in late NY markets they do not. So if a
big buyer of E/CHF appears it will result in a seller of $/Euro.
(Demand for Euro). This explains why the E/$ rate went ballistic this
afternoon.
But why? I am not sure. There could be many motives at play.
The SNB had every reason to intervene. They said they would and they
did. They did what they have been doing for months. But in my opinion
the shock and awe of the last few days is very atypical of the SNB. The
question is, “Were they asked to change their strategy?”
The ECB has shown their hand. They have not actively intervened during
European markets. If they had we would know about it. The ECB would have
announced their efforts publicly. The job of the ECB is to manage a
downward path for the Euro. They are well aware of the collateral damage
to the other markets a weak Euro could cause. They need a weaker Euro,
but they can’t afford a collapse of the bond/equity market. So Trichet
calls up Hillebrand and says,
JCT: “Do us a favor. Make a very big bid in the E/CHF. This will help
us out against the dollar, pound and Yen.” Hillebrand could have
said,
PH: “Okay, we will step up to the plate over the next few days.
First in Europe and the next day we will attack the weak Chicago market.
But here is the deal, The ECB has to cover our losses. We'll
roll them for you at Libor +2.”
JCT: “We’ll cover the losses. It doesn’t matter any more. Go out and
kill some wolves for us.” (Heard muttering in the background: “Cheap
Swiss”)
There is a Fed NY role in this. All Central Banks talk to each other
(they also call big market makers). For me it is not possible for the
SNB to have done anything in the NY trading hours without the knowledge,
advice and consent of the NY Fed. This scares me a bit. We are in very
nervous times. There has been no public statement of any intervention.
So this is the stealth variety. I am not suggesting that the NYFed did
anything today or yesterday. But if the SNB did, they had a chat:
SNB: “We are thinking of calling JPM in NY and putting in a market
order to buy up to 3b E/CHF. What do you think?:
NYF: “Swell idea. The S&P is in the dumper. We are getting calls
from all over. If you bid for size it will roll into the dollar market
and bid up the Euro across the board. Is that what you want?”
SNB: “We are after the wolves today.”
NYF: “Suits us, Have at em. But one suggestion, do it at 2 pm. A few
weeks ago a size order in Chicago at 2:30 caused a 10% micro burst in
equities. Maybe you can do that again today. Wouldn’t it be a hoot if we
actually killed a whole pack of wolves!
I don’t have a pipeline into the NYFed, the ECB or the SNB. This "take"
on the market action in the past few days just lines up with the facts.
If I am right, there are a few conclusions.
-The monetary authorities are very worried and are willing to use
aggressive strategies to calm instability.
-Using the SNB as a single source of global currency intervention will
not work for long. The ECB and the Fed are playing weak hands. They know
if they intervene and fail it is lights out. So their active/visible
participation is a last resort option.
-Another chapter in this story will be written soon. Possibly this
weekend.
The Swiss press confirms your suspicion (my translation): According to «SonntagsZeitung» the SNB intervened thursday and Friday @ 1.4005 SFR/Eur after stopping intervention a week ago.
http://www.tagesanzeiger.ch/wirtschaft/unternehmen-und-konjunktur/Nation...
"Gemäss Informationen der «SonntagsZeitung» intervenierte die Schweizerische Nationalbank (SNB) diesen Donnerstag und Freitag bei einem Kurs von Franken 1,4005 pro Euro. Sie beendete damit eine einwöchige Pause. Letzten Donnerstag setzte die SNB (SNBN 976 -2.40%) ihre Eurokäufe überraschend aus, nachdem der Euro stark gefallen war." [...]
thanks Gunther. I am confused by this. It speaks of intervention Tursday and Friday. I think it was Wednesday and Thursday. So far today a no show but it is just now 2pm.
Also confusing is the rate of 1.4005. That is not correct. The intervention was at higher levels. I think they bought to at least 1.43. Could this possibly be referring to last week Thurday/Friday??
If you see more info on this in local papers could you send me a link. Thanks.
bk
Bkrasting@gmail.com
As the guy in the German helmet says behind the ferns- "Veeeery interesting!"
Awsome (except I thought everything was George Bush's fault) ; )
This is the little swiss boy sticking his hand in the dike's hole...good luck child. There's only the big ocean on the otherside. Heroically stupid, IMHO.
The world's debt wish will not be stopped by little children.
Thanks Bruce.
This explains why the euro and the usd were rallying at times together.
For me it is not possible for the SNB to have done anything in the NY trading hours without the knowledge, advice and consent of the NY Fed. This scares me a bit. We are in very nervous times.
It scares me more than a bit. Where is the legal authority for this? At this point, what is the Fed prohibited from doing in this "special period"?
None Dares Call it Treason.
Bruce, I think you nailed it. I suspect the driver in all of this was Swiss bank exposure to Eastern European debt. If the Franc gets too high it will kill all those mortgage holders. The Swiss and the Swedes need to manage their Eastern European exposure. With the Euro going down, they need to stay on top of the situation.
Actually the Eastern Europe mortgage exposure is primarily held by Austria and the Eastern European banks themselves. My understanding was that they had raised the francs through swaps, and that Switzerland is at most exposed to exchange risk. Can anyone (Bruce or Reggie) shed some light on this?
I would guess that Hildebrand got bitch slapped by Trichet and possibly Geitner, after all the Swiss banks have apparently benefited enormously through the Greek bailout since some (unsubstatiated, think Reggie) articles claim that the Swiss banks have massive amounts of sovereign Greek debt on their books.
So the carrot was the salvaging of bank balance sheets, the stick was the usual threat of increased accusations of "illegal tax competition" and increased pressure on UBS to hand over private bank account information.
The Swiss have a weak hand because so much of their machine exports are to Germany and the rest of the EU. George Fischer, Reiter, EMS, Lonza, Wolfenberger and many more Swiss KMU's sell the majority of their production to the German automobile industry, and 1.40 Francs to the Euro is an all time record high for the Franc. A year ago it was approaching 1.7 Francs per Euro.
The Swiss construction sector is still doing very well, but the machine industry is still reeling. Last week Stadler lost out to Bombardier on a large bid to replace the Zürich subway system double decker trains.
CH,
Great information. This is the kind of information we need here. Not the usual "Ben, Timmy, banksters, hedgies, my mother's investment club" did it baloney.
Seems plausible other than that I can't believe the Swiss will do this indefinitely. No quick market intervention will paint over EU rot. It's not like market participants are panicking for no reason and ol' JP Morgan has to step in to calm jittery nerves.
Bruce - once again thanks, good work, very interesting..
Thanks Bruce for your efforts..
sorry repeat.
Bruce, thank you, its great insight. I agree with you, i was thinking the same way, the central banks must be talking with each other and trying to intervene , but wolves are very smart people, they can also act and see the bluff.
What? No huge USA treasury/Fed outcry about a county manipulating their currency?
Currency manipulation is allowed and even encouraged unless you are Chinese.
Hmmmm... No doubt Beijing will be pointing this out to Hillary...
Exactly!
Bruce, great stuff. Thoroughly enjoying your insights these days. Keep 'em coming. Doc
+1, Bruce has a strong and detailed take in areas like this.
Ditto, keep 'em coming.
Don't look now, but it's spiking again... I don't think it's the real thing though - not their timing.
It's possible. In addition SWISS have been increasing their monetary supply (QE) as if there is no tomorrow. (the Economist has data.)
No question the SNB was in there again, but today it was ~15 mins after the ECB (and/or whichever other CB coordination) acted in EUR/USD. SNB goes right after EUR/CHF ; intervention today was in EUR/USD first... You have another conspirator(s).
Anyone that says Thursday afternoon's (ET) FX action was "short-covering" is either clueless, or lying.