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Trade Against the SNB
The Swiss National Bank has made two significant reserve management
moves over the past decade that have blown up spectacularly. Now they
have put on another big position. Given the past track record, a spec
position against their book might be a winner. First, a bit about the
past.
Starting in 2001 and ending in 2005 the SNB sold off half of their big
holdings of gold. They sold a total 1,300 tonnes. Phillip Hildebrand,
the current chairman of the SNB gave a speech in 2005 to the Institute
for International Economics. He crowed about the success of the program.
(PDF Link).
This chart from that speech tells it all. The SNB sold at the dead
bottom of the market. The four-year program netted them an average
selling price around $350. What a disaster. The 42 million ounces of
gold is now worth $44 billion more than what it was sold for.
The next blunder occurred early this year when the SNB made the terrible
choice of defending the weak Euro against the strong Swiss Franc. They
absorbed an additional CHF 120b in reserves in this losing battle. After
spending a fortune they folded their cards and just watched the CHF
appreciate even more. Today the EURCHF is at the lowest level in
history. How much did this cost? In the first nine months of the year
the tab came to CHF 21b ($22b). Things have gotten worse since 9/30.
My criticism with the SNB is not that they lost money. I don’t think
they should have taken these steps. I doubt they would have if they had
not fallen sway to political pressure. The farmers, exporters and
tourist industry pushed the SNB into a corner. They reacted in a dumb
way at the wrong time and now are paying a big price. I think that in an
effort to gloss over their past mistakes they have now made yet another
mistake.
The most recent move by the SNB was to convert a portion of their
unwanted (and losing) Euro holdings into Japanese Yen. In the 3rd Q they
made a number of reserve shifts to mask their exposure to the Euro.
They reduced their Euro holdings from CHF 120b to 90B. A good chunk of
that reserve diversification went into the Yen. This chart looks at the
quarterly changes in holdings. You can see that the Yen assets increase
by 150% and now total 10% of all reserves.
The SNB bought 1 trillion Yen and sold Euros during the third quarter.
So the result is that the SNB is short EURYEN. But actually they got
long the Euro by shorting the CHF so the real currency exposure is short
CHFYEN.
This is a chart of Q3 for CHFYEN. The SNB short CHFYEN position was put on (functionally) at a level around 82.5.
What has happened since? The CHFYEN has strengthened. A more recent chart:
The one-year chart suggests that the SNB got into this position at a low level but not so far from the average for the year.
But now consider the five-year chart:
The big gap down in 2008 was somewhat of a fluke as during that time the
dollar got excessively strong and money was leaving all of Europe. But
now it is 2011 and Japan is not the darling it once was. My bet is we
see a move in the CHFYEN cross back to the 95+ level. A tradable move.
The FX markets bounce around quite a bit in the short term. Should we
get some gyrations that create a good entry point for a long CHFYEN
trade it might be worth a punt. You will be trading against a big guy.
But that big player has had a losing hand.
Disclosure: Long CHFYEN
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there was a media report today in switzerland that hildebrad warned the swiss government of a possible EUR target of 0.5 CHF.
Bruce, you gotta have 'cauliflower ear' by now - for god's sake, switch that phone to the other ear
70% deaf in that ear. Occupational hazard...
Swizzerland - Jeuro bailout beotchez. (wasn't that the deal?). Merry Christmas Bruce. :)
same to you
b
I am still waiting for that CHF thing to call from the indebted hinterlands. Don't know what it will be but I cannot imagine such a premium is on the Swiss Franc, when everyone and their brother knows they have problems of their own. Maybe big problems.
The CHF can't keep hanging out there like it is some pristine safe-haven. I would love to know when it is going to happen...but it will happen.
That having been said, it looks like, according to weekly charts (granted, the least reliable in this volatile market...), the EURCHF is due for a retracement to the upside over the next few weeks, while the CHFJPY has topped on its weekly chart and looks to be going to make a move back to about 83.59, at least.
Of course, there is no way to really know for sure until the trend breaks one way or the other. These will be an interesting few weeks over the beginning of the new year.
Best of luck with your trade!
:D
Nice stuff, please do not stop. I really like the drawings on the charts; provides context
Central bank losses don't matter. They're backed by taxpayer money and digital dinero. And run by the smartest people in the room after Scary Larry Slumbers. Never Worry! All's under control!
Why, for the life of me, I do not understand why the central banks need report anything to the public or even their gubamints. They can always be trusted to do the next right thing.
In other words, a trader might go Long on the CHF/JPY, which is highly correlated with the AUD/JPY, which, of course, is highly correlated with the S&P 500.
If you are not optimistic about equities (and assuming this trade isn't part of an overall portfolio hedge)...then this suggestion doesn't make much sense.
Additionally, stating that the precipitous drop in the CHF/JPY in 2008 was a fluke is ridiculous. The rise in the CHF/JPY leading to the mortgage meltdown in 2008 mirrored the rise in the carry-trade, high risk instruments like GBP/JPY or AUD/JPY. When the shit hit the fan...they all correlated close to 1. The only difference is that the moves in CHF/JPY are not typically as extreme as the others...
Even if you do somehow believe it's different for the CHF/JPY...then look at the correlation between CHF/JPY and AUD/JPY in the past year: It's still over .80.
So we're left with an a pair that did the same thing as the currency proxy for the S&P before the crash, during the crash and after the crash...yet the CHF/JPY drop in 2008 was somehow a fluke. Weak.
The fact is, if the S&P goes up, this trade will do well, if not...then not so much. You're simply buying the ES, even if you don't know it.
Eventually you'll be correct...so long as you don't use a Stop-Loss. But anyone can be correct in currency markets with a long enough time horizon and no Stop-Loss...until, of course, their account becomes a mushroom cloud.
Bruce, you don't want to do this. This has like a .5 prob. of paying off; even after you get stopped out. It's not convincing. Admitedly, I have surgical scars all over my body from the FX market, and I'm very very difficult to convince; but this really just looks like "another idea"; but not the idea.
Thanks Bruce, as always another good article and a good catch.
http://www.youtube.com/watch?v=9b7RmJJP5uM
Great post. There are futures options with excellent liquidity on the yen and the Swiss frank. Safest way to play this IMO. As Bruce points out, this stuff tends to bounce around.
This is a leading indicator for rising volatility
Im playing it with Long VXX, thx