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Houston - We have a problem, in Switzerland

Bruce Krasting's picture




 

Houston - We have a problem, in Switzerland

Courtesy of Bruce Krasting

The ‘risk off’ trade is commanding the markets. A subtle, but interesting example is the EURCHF.

For four days the EURCHF has held to 1/8th percent away from the official 1.2000 peg. It sits at 1.2016 as I write.

Wherever you look, from China to Japan, to the USA, and the EU, trouble is brewing. As currencies go, there is no safe haven left. The Yen has benefited (as I anticipated, Link). There may be more Yen strength ahead as the market turmoil escalates, but I think that the Yen is no longer a safe place to hide.

On the other hand, Switzerland’s economy is doing very well, thank you. Its economy is growing and it has low unemployment. Thanks to an artificial exchange rate, (The Peg), it is still maintaining a trade surplus with its poorer neighbors.

There is evidence that money continues to poor into Switzerland. Six month T-bills are now trading at -25%. That the short end of the curve is trading at negative levels is not all that surprising, but the Swiss two-year went negative earlier today:

 

 

There is only one thing that can make the 2-year go negative. Demand. Hot money is getting converted into Francs, and then it is pushed forward in the swaps market.

The following is a slide of the EURCHF three and six months swaps.

 

 

Note that they are trading at a discount (left side larger than right). To determine the market price for six-month EURCHF, take the bid side (.0026) and subtract it from the current spot rate (1.2016)  - that yields 1.1990. This means that the outright six month forward EURCHF is trading below the 1.2000 Central Bank peg.

This slide looks at the one and two-year swap spreads. The implied outright forward EURCHF for one and two years are 1.1957 and 1.1792, respectively.

 

 

The swaps and bond market are showing that that money is coming into the Franc in a significant way. But the EURCHF has not touched on the magical 1.2000 level and there has been no reported Swiss National Bank (SNB) intervention. This does not add up.

Two possibilities:

1) Some very big (and ballsy) prop desk/ hedge fund is shorting the CHF to the market and using the negative cost of money as a carry trade to fund other investments. This is a beautiful trade as one is “guaranteed” not to lose money on the short CHF position because the SNB has “guaranteed” that the Franc will not exceed 1.2000.

While this is possible, I consider it unlikely. The negative cost of money may look attractive on paper, but there is no real guarantee from the SNB that the peg will last for the next two years. Money is cheap and available in other currencies all over the globe right now; there is no need to gamble the house to save another ½ percent on funding costs. If the peg were to break, that ½ percent savings would turn into a 20% loss. The risks and rewards of shorting the Swissie just don't justify it.

2) The SNB is involved with “sub rosa” intervention in the currency market. It may be using one or more banks (to make it look like commercial buying interest) to bid for Euros above the 1.2000 peg rate. Alternatively, the SNB may be offering EURCHF FX options to market makers.

I think #2 is happening. The SNB is quietly doing its best to avoid a visible and splashy round of intervention. If true, the SNB will have to back off in the near future and allow the Franc to trade at the 1.2000 peg. At that point it can be as aggressive as needed.

The EURCHF may be the tipping point for a new round of financial instability. I see this tipping into the dark side. I see this happening before week’s end.

ht/ms

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Tue, 04/10/2012 - 23:12 | 2333504 palmereldritch
palmereldritch's picture

Is Switzerland part of the Euro?

So if the Euro dissolved [sorry 'vaporized'] how many continental currency options would be available?... Once freed from its peg would it not be ready to launch like a balloon formerly held and restrained under water?...Other than fresh, new Deutschemark still wet from the printers and given CHF's legendary status as a currency of 'security', what are the other options? 

Next to gold it would be the most secure of a temporary oasis and much more liquid than all those PMs parked in Zurich.

Could it be the Euro's canary in a coal mine?

http://www.youtube.com/watch?v=dQEIYjS1ePY

Wed, 04/11/2012 - 05:47 | 2333887 Sandmann
Sandmann's picture

to poor into Switzerland   POUR into Switzerland

 

Switzerland is pegged to the Euro

Tue, 04/10/2012 - 22:30 | 2333438 AndrewCostello
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The truth is that most investors wouldn't know a good investment from a bad one.  They are all financially ignorant.  Which makes it easy for the paper fantasists.  But sooner or later, they will fall.

 

Read this book and get out of the system.  Stop being a paper slave.

http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref

Tue, 04/10/2012 - 20:15 | 2333233 DeadFred
DeadFred's picture

Reading posts saying the trading on Italian banks is halted and nettlesome CHF peg is going into meltdown mode this week is much more fun than reading that we'll have big troubles sometime after the election. Some days on ZeroHedge are more equal than others.

Thanks Bruce for another interesting post.

Tue, 04/10/2012 - 19:06 | 2333082 ebworthen
ebworthen's picture

More Euro SHTF to come as Spain and Italy go down Greece's road.

The good gamblers are getting their chips off the felt before the loaded dice are rolled.

2008 all over again; after Trillions of Central Bank money cotton candy making in equities.

CNBC and other Finance wing nuts still talking as if retail investors are in the market or thinking about buying in.

The MSM propaganda and Central Bank equity fluffing can only last so long before reality once again intervenes.

Get your chips off the felt before they switch the dice on the craps table.

Tue, 04/10/2012 - 19:55 | 2333187 Bear
Bear's picture

Are you saying ,,, "This time it really is different"?

Tue, 04/10/2012 - 22:34 | 2333443 TBT or not TBT
TBT or not TBT's picture

Nah, historically default is Spain's middle name, and Italy's maiden name.

Tue, 04/10/2012 - 19:00 | 2333065 El Oregonian
El Oregonian's picture

Reality is merely an illusion, albeit a very persistent one. -Albert Einstein

Tue, 04/10/2012 - 18:55 | 2333057 barliman
barliman's picture

 

Bruce?

"I think #2 is happening. The SNB is quietly doing its best to avoid a visible and splashy round of intervention. If true, the SNB will have to back off in the near future and allow the Franc to trade at the 1.2000 peg. At that point it can be as aggressive as needed.

The EURCHF may be the tipping point for a new round of financial instability. I see this tipping into the dark side. I see this happening before week’s end."

What if the Northern European countries (except France & Ireland) kicked the Southern European countries (including France & Ireland) out of the EU and the euro ???

Wouldn't the value of the euro move up rather sharply?

The Swiss do a lot of business/have a lot of money invested in Northern European facilities ... Wouldn't the value of the CHF move up sharply as well?

Would either side of the EURCHF trade lose under those circumstances?

barliman

Tue, 04/10/2012 - 18:46 | 2333043 cfosnock
cfosnock's picture

Bill,

Nice article, can you or anyone explain why The Swiss Peg is bad for it IE what would force them to abandon it?

Tue, 04/10/2012 - 17:16 | 2332852 slewie the pi-rat
slewie the pi-rat's picture

hi freeks dropped the bid & got filled?

Tue, 04/10/2012 - 17:13 | 2332807 devo
devo's picture

What can we deduce from this in terms of inflation/deflation? That there is demand for negative yielding bonds means...deflationary implosion?

Also, what does the author mean by "negative cost of money"?

Tue, 04/10/2012 - 19:18 | 2333089 ebworthen
ebworthen's picture

Housing, urban/suburban land, brick and mortar to deflate.

I would be buying Fed Ex and UPS if I was willing to play, after a big drop - probably rails too - but only after a huge drop (S&P 800 or lower).  Brick and Mortar is dying because they have to PAY HUMAN BEINGS TO WORK THERE.  Much easier to churn people in and out of a minimum wage job filling online orders in a warehouse or delivering them.  Just wait, Amazon and aforementioned companies will find a way to join the exception list for the new "healthcare" law just like McDonlads and other darlings of the open palm politicians.

Necessities to inflate (food, gas, medicine, doctor, water, air, other "utilities", taxes, etc.).

Biflation and stagflation with worse politicians than the 1970's (can you believe it?).

By "negative cost of money" I think he means holding money gets no reward, 1/2 percent at best, so you have to hedge to try and get a better return but with central bank intervention it's a risky business.

Tue, 04/10/2012 - 17:34 | 2332888 skepticCarl
skepticCarl's picture

deleted by the skeptic himself.

Tue, 04/10/2012 - 17:00 | 2332804 malek
malek's picture

Just change the Central Bank peg to 1.2500 tomorrow, that will teach the evil speculators a lesson!   /s

Tue, 04/10/2012 - 17:07 | 2332829 Ratscam
Ratscam's picture

you mean the evil outside speculators, not the inside bankers?

Tue, 04/10/2012 - 16:42 | 2332735 long-shorty
long-shorty's picture

"Six month T-bills are now trading at -25%."

Really? Then I have 10 bil in Swiss T-bills I will sell you for only -20% yield to maturity.

Tue, 04/10/2012 - 16:09 | 2332567 Ratscam
Ratscam's picture

Bruce, did you check on how much of the toxic stocks worth 68 billion chiffs at book value, given to UBS, has actually been paid back?
I guess zero.

Thu, 05/10/2012 - 08:51 | 2412728 Ar-Pharazôn
Ar-Pharazôn's picture

ubs payed back to the confederation the entire loan it received

Tue, 04/10/2012 - 15:58 | 2332499 cbaba
cbaba's picture

Thanks a lot Bruce, very good analysis.

Tue, 04/10/2012 - 16:50 | 2332774 tom a taxpayer
tom a taxpayer's picture

I second that emotion. Thanks, Bruce...you have a very sharp pencil!

Tue, 04/10/2012 - 15:49 | 2332448 Ghordius
Ghordius's picture

"The EURCHF may be the tipping point for a new round of financial instability. I see this tipping into the dark side. I see this happening before week’s end".

All this before week's end? Then it would be a speculation of the size of dozens and dozens billions - that big and that greedy?

Tue, 04/10/2012 - 17:22 | 2332864 Buck Johnson
Buck Johnson's picture

A monster is just under the dark waters of the ocean and it's about to rear it's ugly head.

Tue, 04/10/2012 - 17:27 | 2332879 Ghordius
Ghordius's picture

I wonder if we get to assassinations for taking the wrong monetary stance or trade..

The DSK case was such a classical honeytrap... and it was probably only political.

Wed, 04/11/2012 - 05:49 | 2333889 Overflow-admin
Overflow-admin's picture

"assassinations" Sure, read about finacial repression!

"it was probably only political" -> If you include all greedy behaviour you can imagine in the meaning of "political", I guess you're right!

Tue, 04/10/2012 - 15:45 | 2332426 CClarity
CClarity's picture

Let's not forget what this does to Hungary and, by extension, Austria as the Austrian banks leant many many mortgages to Hungarian borrowers in Swiss Franc which has become disasterous in the twice IMF bailed nation.

Tue, 04/10/2012 - 17:23 | 2332870 Ghordius
Ghordius's picture

There is a Hungarian law fixing this. Literally fixing it.

Tue, 04/10/2012 - 15:45 | 2332423 Clowns on Acid
Clowns on Acid's picture

" Wherever you look, from China to Japan, to the USA, and the EU, trouble is brewing. As currencies go, there is no safe haven left."

Oh nyes there is. There is the de facto currency of gold (and silver) that is freely available to invest in. With Swissy at -2.5% return....at soem point investors must divert some of their swissy to gold.

What is 2 yr gold lease rate at? Seems like it would compare favorably with the 2 yr swiss swap rate.

Tue, 04/10/2012 - 15:41 | 2332409 swissaustrian
swissaustrian's picture

Definitely not flight to safety.

CS and UBS are down big time today - just like any other tbtfb. If the Swiss government needs to save these two, we're fucked and the CHF is toast.

Tue, 04/10/2012 - 21:17 | 2333323 schatzi
schatzi's picture

That is the main reason I don't hold Swiss Francs. Your two banks will be your undoing.

Wed, 04/11/2012 - 03:50 | 2333830 Nukular Freedum
Nukular Freedum's picture

Is this what they mean by backwardation?

Yes maybe it is a UBS, CS inspired event. Third possibility.

Tue, 04/10/2012 - 16:02 | 2332524 Ratscam
Ratscam's picture

come on those two banks only have 500% of CH GDP on their books ...

Tue, 04/10/2012 - 16:10 | 2332573 Manthong
Manthong's picture

Didn't the toaster actually get turned on in December with the CHF peg?

Tue, 04/10/2012 - 16:28 | 2332686 swissaustrian
swissaustrian's picture

September. Yes that's true, but we're not yet boiling.

Tue, 04/10/2012 - 15:38 | 2332396 HarryM
HarryM's picture

Starting to look like dissolving the Euro has more positvies than negatives long term.

 

Tue, 04/10/2012 - 16:45 | 2332744 Ghordius
Ghordius's picture

Sure, and both Wall Street and the City of London fully agree with you. Makes you wonder, eh?

Think, dammit. If we have back the DM, the FF and the ITL they would cash in really, really big bonuses for all the FX churn they could make. Hence all the propaganda.

No, the EUR is, at this very moment, holding up to the role it was designed, i.e. making multi-stage production across the eurozone possible, and making all realize that if all eurocountries would engage in a round of devaluations, we would not stop at the first one.

And note that the role is not dependent on keeping a strong currency - just strong enough to keep the trade and production financing role up.

Seriously, without the EUR we would have 20 articles a day about "how to exact your pound of flesh out of the european FX mess in one easy lesson" in the blogosphere.

You know how some of those FX accounts are leveraged, do you? And how cheap the playchips are in this casino, this year.

Wed, 04/11/2012 - 05:40 | 2333880 Overflow-admin
Overflow-admin's picture

IMHO, the EUR is holding up the role it was designed by TPTB, not the role people were hoping for. Do you think educated people really want cheap, short-lived manufactured goods (iConsume), in exchange of slavery and global pollution? Do you think it is proper to have around 100g, multi-layer packaging for around 100g food? I'm sure some people are astute enough to understand what I'm saying (and the myriad of implications), as I'm sure any corporation will interpret my message as a death threat (which is my intent - beware bitchez).

 

Let's borrow a corpse to ressurect a soul (firepower is nothing alone. it requires strategy)
We are Anonymous.
We are Legion.
We do not forgive.
We do not forget.
Expect us!

Tue, 04/10/2012 - 15:56 | 2332489 Sudden Debt
Sudden Debt's picture

The weak countries would profit, the stronger like Germany would bleed.

Tue, 04/10/2012 - 22:41 | 2333452 TBT or not TBT
TBT or not TBT's picture

Germany is strong?  

All whole lot of that exporting they did, they accomplished by offering credit, which will be defaulted on. 

They got the workers to work that hard and well by offering them pensions...benefits they'd get on down the road you see, not in the present.  Pensions which will not be as nice as promised, by a long shot, because they can't be, short of some series of technological productivity miracles beaming down within a decade or so.

The Germans who are still able bodied when they start to realise what's happened will be pissed off, but not so numerous as to cause inordinate harm, as they did after the Weimar Republic mess.    Buh Bye Teutons.  

Tue, 04/10/2012 - 15:46 | 2332431 LawsofPhysics
LawsofPhysics's picture

By design.

Tue, 04/10/2012 - 15:36 | 2332383 SAT 800
SAT 800's picture

I think this is an interesting article and well worth reading. I don't know where to post this; but I just sold the Jun "US Treasury Bond" contract on the CME at 141-15l /SHORT. In case anyone is interested in looking at that. This is based on a declining upper trend line; and the general idea that this contract is weak and saleable when it rallies. This is the "Long Bond Contract", but for some reason they list it as "US Treasury Bond Contract."

Tue, 04/10/2012 - 15:58 | 2332497 rufusbird
rufusbird's picture

Setting the hook eh? I hope you have a strong leader. I give you credit for grande huevos! Fish on!!!

Tue, 04/10/2012 - 18:38 | 2333033 opnwhlracer
opnwhlracer's picture

Grande huevos indeed! Good luck to you on you trade sir. Myself, I am long TLT via call options. Just rolled my April's into June today.

Tue, 04/10/2012 - 15:36 | 2332382 Sudden Debt
Sudden Debt's picture

Long live the Euro!

Tue, 04/10/2012 - 17:12 | 2332839 disabledvet
disabledvet's picture

"Sudden debt" in Illinois.

Wed, 04/11/2012 - 04:34 | 2333853 StychoKiller
StychoKiller's picture

Sudden?  More like years in the making!

Tue, 04/10/2012 - 15:38 | 2332392 SAT 800
SAT 800's picture

Well, "Long" is relative, I suppose. 12 years seems like a long time for a half-assed experiment designed to prevent embarrassment of the French Franc by the more stable Deutschmark. It's becoming clearer by the minute that the individual countries would be better off with currencies that suited their particular circumstances.

Tue, 04/10/2012 - 16:00 | 2332500 Ghordius
Ghordius's picture

Sure, they would float just fine... LOL

You are just commenting in an CHF bloody PEG (well, floor) bloody "under possible speculative attack soon" small european currency article and you bring that bloody old lame argument? Have you lard on your eyes?

The bloody EUR was specifically designed because it was SICKENING how the Masters Of The Universe attacked small european currencies - jolting the whole network of continental trade with wrong signals.

Just dropped off your pants, eh? Too much propaganda...

Tue, 04/10/2012 - 15:55 | 2332481 Sudden Debt
Sudden Debt's picture

My currency would be the Belgium Franc. I would lose 25% overnight. Why do you think I'm into PM's?

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