dots, but there may be some short and longer-term currency
implications. There is a EUR/DLR aspect to this as well.
Consider first an interview with Philipp Hildebrand President of the Swiss National Bank in the French language magazine L’Hebdo. Mr. H spells out the SNB currency intervention strategy as clearly as he can:
“Our mandate is very clear. It is one of the most explicit of all Central Banks:
The SNB provides price stability. In so doing, it takes account of changing circumstances. The SNB has no foreign exchange objectives.”
He leaves no room for misunderstanding of this simple mandate:
“That is what we do not stop repeating. And that is the yardstick that our actions must be judged.”
Okay we got it. The SNB will not intervene in the FX market UNLESS there
is either inflationary or deflationary pressures. Hildebrand has been
true to his word on this. On June 17 he said “The deflationary risk in Switzerland has largely disappeared.”
This was a sign that the SNB would no longer intervene and sure enough
the EUR/CHF collapsed. It was a wild ride but as of Friday the cross was
at 1.31 after hitting a weekly low a tad under 1.30. True to their
promise the SNB has been absent from the market.
What does this mean for the future? Again from the interview:
We in
Switzerland have neither deflation or inflation. And the rate of growth
should this year be one of the best in Europe. Approximately 2%.
So H crows that Switzerland is doing just fine and there is no
deflation. To me this is a tip. Hildebrand can’t enter the FX market
anytime in the near term and sell CHF and buy Euros. This would run
counter to his very clear words from August 26 that he would not. He
would look stupid if he did. My read: don’t be long EUR/CHF. That cross
may get leaned on any day.
More dots. An interview with Pascal Couchepin in the influential
newspaper, Neu Zuricher Zeitung (8/29). Mr. Couchepin is a long time
Swiss pol. He was president in 2003 and 08. He led the bailout of UBS.
He has no official position today, but it appears (to me) that he is
looking for one. He has been a long time supporter of Switzerland
integrating/joining the EU. The Swiss people have resisted joining the
EU so far. There would be many advantages, but it would require that
financial and political sovereignty would be lost. That is a Swiss
no-no. From the interview:
"The accession of Switzerland to the European Union is currently politically" unrealistic.”
He explains further:
"People are only willing to take a big step if there is a crisis."
Here we have a guy who is committed to EU integration, who says it can’t
happen unless there is a crisis. So the question to ask is; “What constitutes a crisis?” He tells us:
Such
a crisis could be related to the Swiss franc. Until now we have had
success with the interventions of the National Bank. What happens if the
franc against the euro climbs further and further?
A possible scenario emerges from this. Assume that the CHF does resume
appreciating. The comments from Hildebrand last week suggest that it
will. FX markets rarely undershoot. Should we see a 5-7% appreciation of
the CHF versus the Euro the Swiss export/tourism industry and (the all
important) farmers will be screaming. Couchepin will have his crisis
and some very powerful political forces in Switzerland will attempt to
elevate the debate on whether Switzerland should join the EU.
A debate like that would last a few years, but from the first day that
this gets to the MSM the CHF is going to explode. The market will
immediately recognize that if Switzerland would consider a
link with the Euro the rate of initial conversion would be at a level
much lower than we are looking at today. EUR/CHF at 1.10 comes to my
mind. If the market agrees with this assessment we are off to the races.
If you follow the logic of: “A strong CHF leads to joining the EU”, then you have to ask the question, “What is the politics at the SNB on this issue?”
If the powers to be actually believe in the foregoing logic then they
have every interest to see that the Franc gets stronger. An interesting
conflict of interest.
I don’t know what Hilldebrand is thinking. I do know that the number one
issue that the Swiss are concerned with is losing their currency to the
Euro. On that issue Hildebrand had this to say:
L'Hebdo: Can Switzerland keep the franc in case of membership?
Hildebrand: Some member countries have this type of arrangement. Nothing makes it impossible. But it is a question that should be put to Mr. Barroso (President of the EU) and Ms. Merkel (German Chancellor) ...
This response blew my mind. Did Hildebrand suggest that the door might
be a crack open if Merkel and Barroso would let Switzerland keep the
Franc? The implication is that if the Swiss joined the EU they would
keep the Franc as a local currency, but adopt the Euro for cross border
trade and finance. Again, for this to be even considered as a compromise
the EUR/CHF has to be much lower.
In my opinion Merkel and Borroso would like nothing better than to have
Switzerland join the EU. If the price to pay is that there is a bastard
float of the currencies for a while that would be a small price to pay.
There seems to be some energy developing for yet another big jolt in
EUR/CHF. I doubt the article in the NZZ will be missed by too many on
the Bahnhofstrasse. The NZZ headline leaves little to the imagination:
Strong Swiss franc could force Switzerland to EU
In a strong Franc versus Euro market environment the dollar has
typically moved higher against the Euro. It is shaping up to be an
exciting fall.
I think the window to dupe the Swiss people into EU membership has been missed. Some crisis in Switzerland while the EU still looked stable might have made them go for membership. Now they have seen enough shakiness and uncertainty in the EU/ECB to realize that a loose association, as they have it now, is the much better option. I wouldn't be surprised if Swiss voters would repeal the Schengen agreement in the not too distant future.
And if UBS ever collapses, not even the EU would be able to help them out.
Bruce, you beautiful human being! I made 100 pips last night shorting the EURCHF (so far!).
I love you, man...
Happy for you. This is a very high risk trade. Here is my best guess. We will see 1.27. I would be neutral around there. I think we will see 1.27 several times before it can go lower (and stay lower).
Look at the chart for the past few months. Lots of Vol. Get your seat belt on....
Either way, you da man. TIght stops only 10 pips above current trade, but 166 and still running.
Bruce,
At the moment, practically the only thing that Swiss politicians can think about is which two politicians, representing which two parties, will be elected to the two vacant seats in the Swiss cabinet, the highest rung on the Swiss totem pole. And they are doing all they can to frame the public discussion preceding the votes in terms that advance their parties' interests.
It is not certain that Mr. Couchepin's party, which is fairly unpopular, though not nearly as unpopular as Mr. Couchepin, who was by far the most unpopular member of the cabinet, will be able to hold on to its second seat. For decades it held all seven seats, now it is having to make deals to hang onto its second seat. The NZZ, from which you quote, is the house organ of Mr. Couchepin's party; in fact only members of his party are allowed to purchase or own the paper's shares. His party's weakest points are its close connections to the now disgraced former banking elite, which has cost it a lot of votes, and its having been seen as "wobbly" on Europe, which is particularly unpopular at the moment.
By claiming that a country can't control its own currency if it really wants to - even a first year economics student knows that any country can set up a currency board linking its currency to another without political union -, he is parrying the attacks that will be made against his party by others, and raising a truly absurd bogeyman (that of a union with Europe being necessary to prevent economic collapse); it is hardly a coincidence that his party is all in all seen as the most competent on economic matters. If you can't win with arguments, you try with untruths...
May I humbly suggest that you shut the f*** up about things you don't understand?
very truly yours,
idle muesli
Dear Idle,
Would you like to see a copy of my Swiss Passport? Happy to do so if that would shut you the fuck up.
Idle,
I was hoping you would come back. Yes I am Swiss. But does that make me more qualified to opine on the Swiss economy and politics? I am not so sure.
This is the blog world. Your views and my views are both welcome. No one should shut up. Okay?
bk
Hard to imagine why anyone would think the franc is a safe haven. Their big banks are like 4 times Swiss GDP, and totally exposed to franc-denominated Baltic RRE.
The franc is climbing because EU citizens are moving their savings into francs. If that accelerates, it will be because the EU sovereign debt crisis is worsening. It will not sway Swiss public opinion in favor of joining the Euro.
You should spend more time in Switzerland before you try to make a call like this. And not pay so much attention to one rare politician in favor of joining the EU and his wistful daydreams of implausible scenarios that would swing popular opinion in his favor.
@ConfederateH,
same here in the Lake Leman area, crime is felt on the rise, mostly 'non-French' from bordering France (as far as Lyon/Grenoble) coming to CH to hit post offices, retired people at banking machines, stealing cars (and actually in one case getting shot dead by a CH police officer, which in the suburbs of Lyon was seen as a 'signal', ie: you risk your life when stealing in CH). The swiss have surprised everyone with the minaret referendum, I guess they will be able to surprise as well in the upcoming discussions about criminal foreigners launched by the SVP.
Geneva politics have also shifted right during the last elections where a local party similar to the SVP gained seats.
From my humble view the swiss are not in the EU yet, the federal politicians seem to drift further and further away from the swiss citizens.
Horse droppings!
The theory that Switzerland might have to join the EU to maintain a stable EUR-CHF fx rate is so imbecilic that not even George W Bush would have believed it.
When Central Banks lose control of their currency vis a vis another (crucially important) currency and wish to maintain a set rate, they generally peg it to that currency. Neither Panama nor Saudi Arabia nor Argentina nor Hong Kong, inter multa alia had to join the United States to peg their currency to the greenback. In some cases, such as Hong Kong, they make do without a formal central bank, and merely have a currency board.
Either M. Couchepin is challenged by the facts, or he is being parsimonious with the truth. A far likelier explanation is that he is trying to influence the choice of the new member of Switzerland's cabinet to be appointed from his party, and trying to set the discussion, or perhaps hankering for the limelight.
it seemes like everyone wants their currency as low as possible. would it not be possible for the swiss to retool their economy and prosper with a superstrong franc?
From my perspective in North Eastern Switzerland, the effects of Schengen are what are weighing in on the people the most. Switzerland has been over-run by eastern europeans in the last couple of years, and they have brought a lot of crime with them. The Swiss have also always been sceptical of integration of the southern European lands. I think it would have to be a lot bigger crisis than the franc approaching parity with the Euro to cause the Swiss people to buckle. A rapid increase in unemployment would be an issue, but then they could also stop the "grenzgangers" (French/Germans/Italians/Austrians who commute across the border to work in low tax/high pay Switzerland every day).
The machine industry will also be devistated by a continually rising Franc, they export car parts all over Europe. Novartis and Roche (Pharma) profits will also be hurt.
Those Swiss who live near the borders and are allowed to shop in neighboring countries are making out like bandits, I would expect to hear some noise on this front too.
On a side note, all my Swiss Franc denominated assets have risen faster than my gold, gold is way off its peak when priced in Francs.
The Swiss voted 2009 for the RFID and biometrical pass. So I am not very sure they won't accept to enter the EU GULAG. Sorry for them, but they might be just as dumb.
that was less a requirement coming from EU than from the US...Theres no way CH will enter the EU anytime soon, the public reception of the EU has changed a lot to the negative. Swiss bitchez ftw!
external demand for the franc comes from (a) distrust of other currencies and (b) perception that the franc is safe. If other currencies do not become trusted and if the perception of safety in Switzerland does not change, there is no reason to expect a fall in the Franc outside of normal trading fluctuation. Ultimately it is the Swiss people who must ratify any move to join the EU and I dont see that happening. Not now.
external demand for the franc comes from (a) distrust of other currencies and (b) perception that the franc is safe. If other currencies do not become trusted and if the perception of safety in Switzerland does not change, there is no reason to expect a fall in the Franc outside of normal trading fluctuation. Ultimately it is the Swiss people who must ratify any move to join the EU and I dont see that happening. Not now.
With the few solvent nations of the EU spending billions to prop up the insolvent nations, what the hell do the swiss think would happen if they joined the EU? Why would they want to walk into that, especially if, as they're debating this in the next couple years they see Greece default and perhaps another of the PIIGS? Why tether yourself to that?
Some time ago in Bern a vending machine returned me a 10 cent coin that looked old and tired. Checking the date it was from 1908. Asking a colleague at work when the Swiss Franc came into life he didn't know. Amazed that it still had value after nearly a century in circulation I did the right thing and retired it as a souvenir. Better fate than the undeserved death some politicians want to enact...
I hope the swiss people keep their time tested currency and don't fall into the Eur trap. Keep the currency and change the politicians instead seems a much better deal.
Swiss Franc came into being approx 1850,coins designs and size have remained unchanged since approx 1875,metal content changed from .835 silver on half franc and above in 1968/69.Went to Switzerland a couple of years ago and spent some lower denomination coins from circa 1900 onwards on a few bars of chocolate,felt weird spending coins that old that still had value while base metal.Pre 1850 each Canton or State in Switzerland issued their own coins.Still fiat though if one of the strongest ones.Euro is dripping away into CHF and Gold and Silver.
Have been following your informative EUR/CHF story for a while and shorted at 1.3850 area on Aug 8........good news/bad news.
Bad news, and too bad but the stop was too tight(at 1.3880) and so missed the selloff.......did not re-enter, but that is trading.
I tend to get the big picture right. But my short term timing for entry/exit stinks. But that is trading....
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