Yen. They spent $10+ billion buying dollars and got two big figures in
the FX rate for their effort. I doubt that it will last for a week.
With the Japanese hand being played out the market will be looking at
the other “Strong” currency, the CHF. If the market can’t make money
selling dollars (and Euros) for Yen then it is likely that the market
will turn its full attention on the Swissie.
The 1.30 exchange rate for the EURCHF is already hurting Swiss
exporters, farmers and tourism. It is likely to get worse before it gets
better. With that in mind I thought it was interesting to see that the
Swiss Trade Union, “SGB” is calling for the Swiss National Bank to
either step up its intervention efforts or establish a two tier exchange
rate system. From NZZ today:
The
monetary authorities should intervene directly in the foreign exchange
market, SGB representatives demanded on Wednesday before the media. Export companies should also switch to a special rate euro against Swiss francs.
This kind of talk will make the SNB chief Philipp Hildebrand quake. He
knows that he/the SNB is functionally powerless to stop the appreciation
of the Franc. In the biggest days of intervention they were doing 1-2
billion of sales. How big is the market? The SNB estimates it is 250b a
day. Conclusion? The SNB does not stand a chance.
The SNB reserves are in dollars, Euros and gold. At this point they are
taking big losses on their currency holdings. The numbers to be
announced soon could push another 8 billion Francs for the quarter.
There is a limit to what the SNB can absorb. And the market knows it.
With this in mind the notion of a two-tiered FX rate makes some sense.
The free rate would be allowed to float wherever the markets might take
it. Exporters would have access to a subsidized rate from the SNB and
thus would be largely insulated from market gyrations. The SNB would
have losses to be sure. But those losses would go directly to the
exporters and not the speculators in the FX markets. In that sense it is
not a hard sale to the Swiss people. The flip side is that a lot of the
Swiss want a stronger franc. They can travel outside the country and
shop at a much cheaper cost.
To me the idea of a two-tiered franc is crazy. If implemented it would
be a modern day “Smoot-Hawley” type of event. The EU would go nuts and
retaliate. Half a dozen other countries would copy the Swiss move and we
would be looking at a major breakdown in global trading. From these
types of steps global recessions are born.
But the flip side is will tiny Switzerland roll over and let the global
markets dictate their economy? That would seem unlikely as well. So
something has to give. The most unlikely outcome is that the Swissie
weakens against the dollar and the major crosses.
We are going to hear more protectionist talk in the coming days. The
Japanese have said (through last night’s intervention) that they do no
want to import more global deflation. So they have teed this up. Where
it goes is anyone’s guess. But there are very few soft landing scenarios
out there that I can think of.
If (when) the EURCHF gets to around 1.25 there will be some action. If
it is first renewed intervention and that proves both costly and a
failure the talk of a two-tiered franc will come on the table. I doubt
the Swiss are just going to sit there and get rolled over. The Great
Sucking Noise will get much louder if that should be the result.
It's a race to the bottom alright. The first sovereign (actually its' Central Bank) to ultimately destroy it's currency wins. Oh, wait...
Bruce,
Do you have a throwaway e-mail address so that I can send you the page from today's Contrary Investor? Their gist is that the next round of QE could come from bolstering muni bonds of the varied types. I have a great respect for CI and would like to get your take on their suggestion.
If you find them to be as credible as I do I might buy you a year's subscription as a thanks for your valued input.
I am on the level, but you don't know that to be the case, so why did I mention it?
bkrasting@gmail.com
Trading in CHF is $250bn a day but annual GDP is $500bn a year. One would think that doing $2bn a day is actually going to have an effect over time unless there is tremendous liquidity running around AND the intervention is sterilized.
The issue with this intervention is not its "small size" but the fact that it appears to be sterilized.
no man.
negative interest rates for non domestics. I know the gnomes.
Hitler was right about everything.
everything?
Fighting a mechanized two front war without a secure fuel source was the right idea?
Bruce...who said globalization is good???
The same oligarchs and sycophants of the oligarchs that are trying to perpetuate parasitic positions in society where they do not produce anything but the syphon off wealth not only from a disappearing middle class, but from a shrinking productive entrepreneurial class.
Welcome to "Smoot Hawley" type of event, welcome to any type of event that will sink and cancel a cancer we should have never allowed to be.
The louder the sucking noise...the better!
Sic semper tyrannis..
I wonder what effect a generalized radical default by the Hungarian household sector would have upon the CHF and the Swiss banking sector....
a) even stronger CHF due to credit contraction
:D
Nice Bruce, well done as always.
Does any one have opinion or advice on shorting the EURUSD at this point (around 1.30)?
thanks
A Swiss Trade Union is calling for something? Kind of like "The mouse that roared?"
Size matters!
Even a helpful motorist (most have gone extinct due to cell phones and paranoia) can pull some cars out of the ditch with a tow-rope.
A different size wrecker required for a 'truck' in the ditch.
And let's not get all the way to derailed trains.
The Swissie isn't going to pull anything big out of any ditch.
They'll be busy nursing their own dents, and hope they can get out by themselves.
Countries intentionally suppressing currency rates are utterly retarded.
They should all let their currency rise.
Since they produce everything, their people should get to enjoy the benefits of their labor.
OK. Let's talk "shoulds". How about, for starters, they should not have gotten into this crap in the first place. And now, moving on to other useless topics...
we...
+++
"WE" didn't do it. Our respective governments and central banks did.
We allowed it through "consent" of the "governed".
Indeed ... and the longer the masses keep arguing "Barry will fix it", "no, Sarah will fix it", "no, Ron will fix it", ad infinitum, the sooner it will end in martial law, an SDR, and a very sorry population trading only with food stamps!
When was the last time a local, state or federal government proposed cutting budget and headcount by 50% just to get them back to the share of the pie that they took 20-odd years earlier (let alone a reduction by 85% to get them back to pre-WWI levels of state theft)?
the suppression is nothing but a symptom.
the "crap" is definitely ours.
Multiple currencies, manipulated by fiat and political trickery..is this like the ruble, trade ruble, "hard" ruble ??.
Helicopter Ben must be totally desperate at this stage, as nobody wants the confetti fluttering through the system.
Roubini - the financial system is "not working".
No kidding.
The way it was "supposed" to work, at Bretton Woods, and after 1971, is that the rest of the world weakens their currencies to promote exports, and the global reserve provider has a strong dollar to (1) make foreign central banks feel that the value of their reserves is going up, and (2) to promote the US consumer to buy everything from everyone.
But the more US consumers buy, without selling anything of value in return, the more the US economy is gutted and thus the dollar weakens. And the more that trade imbalances accumulate over decades, the more the pressures build in many areas.
The weakening US dollar hurts producers in other countries, it hurts their central banks, and in the short term only hurts US consumers because now they can buy less.
The whole system is inherently unstable, designed to accumulate imbalances until they fail catastrophically.
Even though this might seem crazy, and today's great moderation is convincing most people that financial crises have been permanently prevented, it is something everyone should think about.
Oh, right....
This was inevitable, but was sped by allowing the exploitation of the environment and workers in third world countries like China and Vietnam. That allowed more jobs to move from the US in manufacturing, then IT jobs moved to India and elsewhere to arb global wages. That killed the current account.
However, if government debt was held down, the US would be in ok shape, because the remedy would simply be to bring the jobs back to the US by imposing tariffs on countries that exploit the environment and workers. However, the Fed gov decided to pursue pointless wars abroad, and a bubble/fraud policy domestically that, when coupled with massive outlays in bad times to all the people that can't get jobs anymore (or to cover bank fraud/insolvency) bankrupted the US government.
Central banking is just a tool of the fraud perpetuated. When gold was used to measure imbalances a country would eventually have to snap back into balance. Now the CBs just play hot potato and keep the status quo.
Triffin's Dilemma, biotches!
We all want a strong economy through exports and the ability to travel on the cheap. As my daddy used to say "Want in one hand and sh*t in the other. See which one fills up first."
The swiss franc currency isn't powerfull enough to do any real damage.
This rock isn't rolling yet.
This is grotesque...
Ostensibly, Hildebrand sold the 1.2T of gold in 2001-2005 in order to increase fiat FX in the reserves. Now is the time to dump the other FX's and buy gold, and to also sell francs and buy gold.
The problem for Switzerland is that this would break the back of the Comex and LBMA, and the US and UK would be sure to retaliate.
It seems either way leads to retalilation, but of the two I would take purchasing gold rather than spoiling labor with special bailouts.
Interesting. As you point out this would lead to a different chaos. And retaliation.
Is there a 'good' option? I think not.
Hildebrand was not running the SNB in 01-05? Why do you blame him?
bk
I remember reading this report by Hildebrand in 2005:
SNB gold sales - Philipp M Hildebrand: SNB gold sales - lessonsIn 1999, the SNB held 2590 tonnes of gold on its balance sheet. At that time, the SNB’s gold stock represented 30% of U.S. gold reserves. In relative terms, Switzerland’s position was extreme among the G10 countries. As you can see in Figures 1 and 2, Switzerland held more than five times the amount of gold on a per capita basis than the second-ranked Netherlands. Similarly, its gold holdings as a proportion to imports also far exceeded those of any other G10 country. In light of this extreme position, it is legitimate to ask why the issue of gold sales did not arise much earlier in Switzerland.
For one thing, public opinion in Switzerland generally held gold in high esteem as a symbol of monetary stability. More importantly, however, a reduction in the gold stock required a fundamental reform of the legal framework of the Swiss monetary system. The process leading up to this reform was lengthy and complex. As you know, Switzerland is proud of its political system of direct democracy and consensual government. On the whole, these traditions have served the country well. Comprehensive legal reforms, however, often require substantially more time than in other democratic traditions.
Despite the fact that Switzerland had been under a flexible exchange rate regime since the breakdown of Bretton Woods, the Swiss franc remained legally linked to gold. For practical reasons, this legal link of the Swiss franc to gold had lost its monetary policy relevance. Nonetheless, it prevented the Swiss National Bank from buying or selling gold at any other price than the official parity of CHF 4’595 per kg. In the late 1990s, this parity was three times lower than the price of gold in the open market. The official parity also determined the valuation of the gold stock on the SNB’s balance sheet. In order to eliminate these residual relics of the gold standard and enable a change in the SNB’s gold policy, the Swiss Constitution as well as the Coinage Act needed to be amended first.
...
What if he prints trillions of CHF and start buying tangible assets in addition to PM's, like land, hard wood forrests, agri-land, selective real estate, undeveloped mines, food processing factories, fishing fleets and whatever else they think they can handle? Outside Switzerland that is.
Would'nt that weaken the CHF? And why stop at a trillion?
A "Buy Iceland Now" (BIN) program. There could be value in this.
Bingo! They can certainly use the hot baths.
The Swiss are very Clean, Impeccable, Fastidious people. While they would seem to have little use for Additional Warm Water, Soap and Hot Baths, their European Brethren on the Western Border, has a Distinkt History of Smelly and otherwise Repugnant Personal Grooming Habits, the extent of which Clearly Manifests Itself in their Very Arrogant Self-Centered Culture, Clearly Exposed in French Philosophy as Evidenced by that Wonderfully Hillarious form of Humor Oft Referred to as "Sartre-trie" from which Extended a most Famous and Telling French Joke;
"I Smell, Therfore I Am."
Ergo, a wonderful paired trade; Long Swissy, Short Frenchy. Slam dunk-a-bunk-a.
I have long thought this was a solution Bernanke would pursue here... a modern-day version of the 'blocked mark' concept from Weimar. German authorities wouldn't let you leave the country with marks, come into the country with francs, or convert marks to pounds, francs or whatever.
You have a nonconvertible domestic currency that we call Bernanke Bucks, backed (like assignats) by the RRE paper on the Fed's books. You have the regular old $USD used for international trade. Conversion is a roach motel... it only goes in one direction.
Fed can set the conversion rate at anything it wants, to engender domestic inflation. When it decides it's done, it sets the reconversion rate and sops up all the liquidity in one swoop.
Most people wouldn't even understand how they'd been scrood. Their direct deposit would work, their ATM would work. Probably the bills would have the same dead presidents on them. Just the signature in the lower middle left would be Benjamin Bernanke.
I'm currently reading, "When Money Dies", by Adam Fergusson
even when the Marc was blocked, the citizens were forced to break the law and use foreign currencies in their daily lives
the problem was that the stores refused to accept the Marc because they knew it was garbage
The stores got tired of people doing 10 minutes of math at the checkout counter. Those were pencil and paper days, and the lines were ridiculous as the tallies were calculated. Folks would get up at 4am to go shopping and it would take all morning. Modern "Neanderthals" are placing a calculated bet that some store owners in the same situation would welcome trading a set amount of groceries for ozt silver. It's not like the tax system would be keeping up, even in the computer age. Computers go down you know.
Bernanke would never do this. The FED is a private entity with its shareholders being multi-nationals which depond upon moving goods and dollars across borders.
Look at how South Africa used the "financial rand" to manage domestic and foreign valuation of its currency and mining shares. Nothing new is under the Sun.
Instead Bernanke, or should i say his masters called the Central Bankster System with headquarters in the City Of London, will push for SDR. These banksters need an 'independent' currency they can print out of thin air (like Dollars, Euros, etc) to 'save' the world economy yet have it not directly associated with a single country.
Money for nothing and your chicks for free.
when confidence in fiat currencies is lost, it won't be restored with another fiat currency regardless of who issues it
bronzie, i wish you were right, but seemingly sharp folks keep smoking after their third cardiac-arrest, etc.
argentina... twice down, and paper still rules. paper's too convenient, relative to hard-asset barter. it'll be interesting to see if we trust our digital infrastructure enough to obsolete that 'barbarous relic' called paper-money soon.
digital money is even more convenient, especially for the gubmints and TBTFs.
it's gonna be interesting, to say the least, but assuming folks will learn from this... well... a few might. probably readers of ZH.
Never underestimate the stupidity of the average Joe.
He's not graduating high school with any education in economics or monetary policy under his belt, believe me.
I think the global recession is inevitable at this point, where protectionist measures are proposed and considered as a viable alternative. Look out for weak governments/countries, the usual suspects, for where the first currencies will fail.
Thanks for the updates, Bruce.