Swiss National Bank

A confirmation on this could come shortly. My thoughts if it should come to pass.

Just one headline from Bloomberg, which says it all:

• HILDEBRAND RESIGNS

It is unclear which FX trading company he will join next. As expected, the entire politically charged campaign against Philipp was set to culminate with his departure. And now that the scapegoat is official, it may be time to revisit the EURCHF floor which will likely be the next to go.

All you need to know.

I go schizoid.

This is the question of the hour. Which way was it?

Someone gave Kashya Hildebrand very bad advice. She went on TV. Now there are more questions than ever.

The year is just a few hours old, we already have a stink.

Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST). We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg? Here is what is going to happen:

•  SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
• For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
• If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
• According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
• In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
• As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
• A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.

The September Swiss National Bank balance sheet update is out and while it reportedly indicates balances at the end of August, it appears that the SNB intervention in the FX market (i.e. the currency peg) started early, which would make sense as the first peg rumor hit on August 11. As a result, as the chart below shows, the latest central bank balance sheet to be completely devastated as a result of currency wars is that of Switzerland, where both Foreign Currency Investments and the total balance sheet increased by just under 50%, the biggest such monthly increase. In fact, in September, "aggregate short and long positions in forwards and futures in foreign currencies vis-a?-vis the domestic currency (including the forward leg of currency swaps)" increased by $92 billion CHF or just about $100 billion - a whopping 20% of Swiss GDP! And this is the capital at risk for Switzerland to avoid having its currency trading a parity with the euro since the bulk of this increase is due almost certainly purely to EUR purchases. And here is the bad news: since the bulk of the purchases were made in the 1.40+ area, we can't wait to find out just how NZZ and other Swiss financial publications will react tomorrow when they learn that the SNB has experienced an immediate 5% drop in its "assets" courtesy of the subsequent plunge in the EUR. And with the SNB's total balance sheet at a record (?) CHF 365 billion, something tells us that the days of this latest attempt at repegging the Swiss Franc to some arbitrary number are coming to an end, and with that Hildebrand's futile attempts at preventing parity.

Confirming that this is a market for idiots, by idiots, was the 4 am response in the price of gold, which following the SNB's Swiss Franc peg announcement did not surge, as it should have considering that the SNB just singularly changed the role of the CHF from a "flight to safety" to a carry currency, making gold the only island of stability in a world of fiat insanity, but instead plunged by over $50. Subsequent attempts to regain the $1900+ level were met with constant program selling for no other reason, than just because someone 'else' was selling. Of course, the logic is completely and totally the opposite. But don't take our word for it: here is Reuters: "Switzerland's decision to peg the erstwhile safe-haven franc to the euro may finally give gold bugs the chance to see prices hit the once-unimaginable $2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades. By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation. It has also impacted the Swiss currency's status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said." Precisely. And it is not only Reuters: Bank of America's MacNeill Curry said that Gold will probably rise to $2,050 this year. The rationale - identical to the above: SNB decision to peg franc to euro should also support gold. "They have taken out one of the big safe-haven assets, which is the Swissie." As for the amount of time the idiots will need to realize that QE3 coupled with the SNB action means that gold is now valued somewhere well over $2000: at least a few days...Which everyone who looks for even the smallest golden pullback will be happy to take advantage of.

Currency markets have seen massive volatility this morning after the Swiss National Bank decision to fix the Swiss franc to the euro. Just prior to the announcement, spot gold for immediate delivery had risen to a new record nominal high of $1,921.15/oz in early morning trading in Europe. Then just before 0900 hours GMT came the news that the Swiss National Bank has decided to fix the country's exchange rate at 1.20 Swiss francs per euro. The SNB indicated it would buy an unlimited amount of euros regardless of the risk to maintain that value. In a matter of minutes, gold fell 3% from the high of $1,921.15 to an inter day low of $1,862.72. It then recovered as quickly and surged back to over $1,912/oz. Gold’s London AM fix this morning was USD 1,891.00, EUR 1,330.75, GBP 1,172.86 per ounce. Gold fixed lower in all currencies (USD 1,896.50, EUR 1,341.13, GBP 1,174.67 per ounce). The SNB announced the currency fix because of what it called "the current massive overvaluation of the Swiss franc." It said it will "no longer tolerate" an exchange rate below the minimum rate of 1.20 francs, which it said is still high.

If yesterday's news broken by ZH that one bank was in dire need of US dollars and ended up borrowing $500 million from the ECB was enough to send the market down almost 5% today, then the follow up news that the FRBNY just reactivated FX swap lines with Europe will likely send ES limit down at tomorrow's open. The FRBNY has just announced that in the week ended August 17, it lent out $200 million to not the ECB, not the BOE, but the "most stable" of all banks: the SNB. This is the first use of the Fed's Swap Lines since March, and the most transacted under this "last ditch global bailout swap line" (see more on how the Fed bailed out the world using swap lines here) since October 2010. This event also gives us a hint that the European bank in question in dire need of cash is Swiss, which in turn means that it is not some usual PIIGS suspect, but one of the two "big ones." If true, this means that the European insolvency, liquidity and what have you crisis is about to take an exponential step function higher.

Remember when way back at 3am EDT, the SNB "intervened" to keep the "massively overvalued" franc lower? Yeah, that lasted about 7 hours.

With TEPCO stock dropping to a fresh all time record overnight at just over Y300, it is pretty clear what the fate of the company is at this point. What was less clear is the fate of TEPCO debt, of which there is just over $90 billion, and which many had expected would be made whole once the company is nationalized. Well, one entity is not taking a chance. Three months after quietly excluding Irish bonds from its General Collateral basket, the Swiss National Bank, by far the most prudent of all central banks in the current race to the bottom regime, has decide to take out 600 million in CHF-denominated bonds out of the eligible basket. Perhaps this is an indication that at least one investor is not quite so sanguine about the lack of impairment in TEPCO bonds: all those who have been selling TEPCO CDS in hopes of a JGB-TEPCO compression trade may want to take note...

As widely speculated previously on the pages of this blog, the SNB confirmed earlier it has lost billions of euros due to currency speculation in attempting to keep the CHF low. As the FT reports: "The Swiss National Bank on Wednesday revealed the cost of its massive foreign exchange interventions to restrain the value of the franc, with losses of more than SFr14bn ($13.3bn, €10.4bn) in the first half of this year." Following such a massive losses for the small country (nearly 2% of GDP) it was only a matter of time before the other 26 Swiss cantons, which share in the profits and losses of the SNB, said enough. "The SNB said last month it had stopped intervention. Its official reason was because deflationary risks from the surging currency had declined, but most economists ascribed the move to growing concerns about the risks from the massive foreign currency holdings." Yet it appears Switzerland has its gold holdings to thank for keeping the loss manageable, and why, at least the SNB, will not allow a quick depreciation in the price of gold, for as long as the EURCHF continues to be at these low levels: " the central bank was, as in the past, a significant beneficiary of the
surging gold price, allowing it to take big paper profits from revaluing
its large bullion holdings. The rising gold price allowed the SNB to
“hold the loss within certain limits”, it said in a short statement." Elsewhere, we read that the Swiss economy is being aggressively liquefied with both M3 (up 7.7%) and loan issuance (up 4.4%) surging in June.