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Desperate Measures
After Bernanke capitulated on the Fed’s responsibility to balance it’s dual mandate and committed to keep ZIRP alive for another 24 months the Swiss Franc exploded in value. It was up 6% in just a few hours. That was the biggest one-day move in 30 years.
The Swiss National Bank is getting desperate. They responded by announcing new emergency measures. They are immediately increasing “sight deposits” by CHF 40B. This is the second increase in a week. The two actions together will increase liquidity in the banking system from CHF 30B to CHF 120b. A 400% increase.
We are confronted with huge numbers every day. What does an increase of CHF 90b really mean? It’s a very big deal. Swiss GDP is about CHF 500b. So the increase in liquidity is equal to 20% of GDP. Now think of US GDP at $15 Trillion. What the Swiss have done in just a week is equivalent to $3 trillion in a big economy like the USA. That is massive.
This is the language from the SNB yesterday:
The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability.
This was the sentence that caught my eye:
To accelerate the increase in Swiss franc liquidity, the SNB will additionally conduct foreign exchange swap transactions. The foreign exchange swap is a monetary policy instrument which the SNB uses to create Swiss franc liquidity.
From this I conclude that not only is the SNB trying to push interest rates to zero, they intend to push the interbank swap rates for Swiss Francs to BELOW ZERO. This is a form of intervention that is intended to discourage speculative holders of SFR. This action by the SNB is working as of this morning. The CHF has backed off against all currency pairs.
One sees the evidence of the monetary intervention in the short date swaps. This morning the Spot Next and Spot a Week roll of CHF to dollars is being priced in the hole. This is the area of the market where speculative holdings of CHF are rolled over. The one week bid offer spread pricing this AM is:
-1.9 / -0.83
Note that both sides of the swap are negative. This implies that CHF interest rates are negative. The left side (the bid side) is the price one has to pay if they were long CHF versus dollars and wanted to hold onto a long position for a week. Some math:
The USDCHF spot rate is .7378. The cost of the one-week roll is .00018. The cost of rolling a long CHF position of 10,000,000 Francs comes to $3,307 per week. That may not seem like a big deal as the dollar equivalent of CHF 10mm is $13,550,000. But that is not how things work in this big casino.
Currency trading is done on very high margin. Many participants can play at the table with only 2% margin. Others have to come up with as much as 5%. What does $3,307 come to when the equity involved is only a fraction of the principal? For the 5% player it comes an annualized cost of holding the position of 23% of equity. For that big shot who plays with only 2% down the rollover cost comes to an annualized penalty of a whopping 63%.
From long experience in this business I can tell you that short-term currency traders HATE negative carry trades. A long CHF position now has a big cost to it. If a trader has a short Dollar/Swiss position of $100mm (a modest currency position for these folks) the cost of holding it is now $25,000 a week. This cost was zero two weeks ago. This squeeze on short date swaps is a very good reason to cut those short dollar positions. That is exactly what has happened so far today. The CHF has backed off (a bit) against all other currency pairs as of this morning. As of today, the SNB has achieved its objective of getting people out of the currency market.
This won’t last for long. There will be another tremble in the market that gets people scrambling for safety. The “go to” trade will still be to buy CHF when that happens. The cost of ownership be damned. What will happen as a result of the liquidity steps is that greater volatility in spot Swissie will occur.
The relative rate of the CHF versus Euros or Dollars is important to the SNB. But even more important is the rate of change. The short date squeeze by the SNB may result in a bit of retrenchment for a few days. But it will almost certainly result in increased volatility.
My take on the actions by the SNB is that they are trying to buy time and create a more orderly adjustment to a stronger CHF. I think the consequences will be that we will have violent intraday adjustments, but over the course of a month the Franc will be stronger anyway. The SNB is trying to buy time as measured in days. To me, that is no plan at all, just a desperate act by a desperate central bank.
How long is the list of Central Banks that are undertaking extreme measures to influence very short-term outcomes? The list is endless. Virtually every CB in the world is doing it today. As a result, extremely high volatility across all markets will prevail. Squeezing short dates often has a negative affect. Something always blows up as a result. Yet every central bank is attempting essentially the same thing. They are trying to buy time. They are the source of the volatility we are living through.
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This is a big change and I hope it will not affect in a bad way the things in the country. Asigurare locuinte
They are the source of the volatility we are living through.
Define source when it comes to volatility.
To me they are an amplifier of volatility, but not a source.
But maybe this is just a semantical issue.
In 2001 the Swiss People voted down to initiate negotiations for an entry into the EU.
Exactly what is happening now in a stealth fashion initiated by the SNB.
The press in collusion with a large section of the political class has managed - by constantly parading for a few months the specter of a strong Franc killing Jobs in the Export Sector and Tourism - that now virtually everybody in Switzerland is applauding the move of the Central Bangsters.
Never let a crisis go waste...
LOL
"...in a stealth fashion initianted by the SNB."
yup, that's my read...but i'm new to this stuff.
Mr. Krasting,
by "this won't last long" do you mean until the next bailout is certain to be announced?
ConfederateH's idea seemed brilliant.
janus
Soros is really upset. He was trying to break the SNB. Seems like he's the one about to be broken.
I was at the Intel Hub and there were several videos showing train loads of military equipment, including trucks, tanks, artillery, etc being moved around the U.S. Some of the trains were miles long. These were supposedly recent videos.
So it may be that plans are underway for some type of battle against riots, revolts, insurrections. Not sure, but worth watching.
Sorry for the ignorant question. Why is CHF so attractive? My limited understanding is that CHF was once backed by gold but is fiat like everything else today. What makes it better?
Swiss rates:
http://ftalphaville.ft.com/blog/2011/08/11/650656/when-a-government-bond...
Bruce, you're a saviour. Had already taken most of my CHF/EUR position off the table before this happened, but your post and TD's tweets about a peg rumour provided the push to close out the rest. THANK F**K.
600 pips today sofar, EUR/CHF, ohhh shes taking off, just put on another 50pips in the time it took to write this!
Bruce I'm thinking currency controls are a distinct possibility. Either we all adjust to a new normal, or this gets out of hand, the swiss run out of bullets, and we got a real problem.
Bruce as a photojournalist I am amazed at your choice of photographs and the incredible stories they tell along withyour posts. Thank You....
Sometimes it takes me longer to find the "right" pic as it does to write all these things. Thanks for noticing.
bk
I've always assumed that there's some graffiti photo collection out there, nicely tagged up with metadata that you can search for an appropriate word match, but I don't actually want to know the answer. It's like a magic trick, once you know how it works, it ruins all the enjoyment.
I kinda like the mental picture of BK wearing a hoodie and skulking around alleys with a spraycan in hand in order to create the perfect shot.
Don't ruin it.
I was just thinking the same thing.
I just want to know where the got that balloon/ball from.
This is a weather balloon. I bought it online. Took it to the alley and blew it up. No problem.....
Hey, Bruce, do you think you can ... um ... find a picture of lots of anti-Fed graffitti on storefronts in Jackson Hole, Wyoming?
At the end of the day, they will have to peg the franc to the euro, just like CNY is pegged to dollar.
You aren't alone on that note: http://www.zerohedge.com/news/swiss-franc-plunges-600-pips-peg-speculation-will-it-succeed
I understand that this would create a different set of problems but why doesn't the SNB go out and buy stuff -besides other currencies- with it's inflated currency (like a corporation would with an overvalued or high priced stock)?? Gold, oil, foreign land, ships, commodities....something besides EUR and USD (which obviously does shit). Print Swiss francs and buy hard assets with it even....wouldn't that, in addition to purchasing something of actual value also bring the CHF down vs. other currencies?
If there's subsequently a total collapse, at least the government would own all these hard assets which they could then pay out as dividends to their citizens/companies or construct a new currency around.
What am I missing here? Couldn't they do this a least a little bit?... use it as a tool to facilitate an orderly and soother CHF appriciation?
As part of a larger global system of central banks, they have a part to play. When you are woven into a fabric of fiat currencies, it is impossible to have your thread removed, without the whole fabric falling apart. Just as China has been required to backstop US and European bond markets, the Swiss are required to do their master's bidding.
I understand that but at some point, he who defects first defects best and as the Swiss are the most recent converts to the fiat religion (and they have a long history of doing their own thing) one would think that they might be the least enthusiastic about defending this system.
update: Bruce addresses this above somewhat in response to ConfederateH
Once more fab insights BK
Thanks
Did someone say Fabrice?
It's -- fab fab
Bruce, I always enjoy your articles. While I don't always agree, they are thought provoking.
Let's look at this from another angle, when the CB's start manipulating currencies and their economies, unintended consequences ensue. In view of this latest manipulation, how long until real consequences start to shake out and what would be some logical preparations to take? We are seeing a real escaltion in economic manipulation that will have huge effects on the general population. Will it breed more unrest in countries historically numb to such shenanigans? Will we finally see an "Enough is Enough" attitude in Western Europe and the US? How long will this type of currency manipulation go on before inflation begins to rear its ugly head in a real and tangible way? We have seen this ignite unrest in the MENA region, Isreal experienced some unrest over the weekend and the UK started to burn down as well.
What is the next domino to fall in this monetary terrorism that we see unfolding before our eyes?
DaddyO
Hey look! It's Roger Federer! (girls start screaming wildly-run wildly towards him with various writing utensils.)
Eastern European swiss franc mortgages...must be spinning in their kitchens. Capitalism, bitchez!
Bruce, since one of the effects of the SNB forcing the CHF lower is a marked increase in the gold price in terms of francs, why couldn't Hildenbrand just start buying gold massively with CHF? Wouldn't this just be using gold as a lever drive the CHF/Gold price higher and consequently lower CHF to the Euro and Dollar?
I think you're baiting me. You know that this is the only thing the Swiss could do. But the one thing they will never do.
The guy running the show Hildebrand is the guy who is the spokeman for the gold sales. He is on record as saying what a great idea it was to sell all that gold.
Question for you CH. As of this am how much has the SNB lost as a result of those sales?
It is a huge number.
I only bait you when you when you go on about taxes!
It was at a lot less than $900, closer to $300, so my calcs show: 250t*1000k/t*32oz/k*1000chf=8b chf loss.
Bruce, do you think that this means that Hildebrand is going to try to debase the CHF along the lines of the Euro/Dollar? Since CHF depots pay nothing and soon will cost money, it looks to me like now is the time to sell CHF bonds and buy gold.
They sold 250 tonnes, completed sales in mid 2009? Average price unknown, but gold spot was averaging around $900 maybe.
So, yes they let some money behind. A double since then.
when the shadow banking derivative positions get netted out we will see who is lying dead on the beach.
Good article Bruce.
If UBS and friends start cracking then we will see some real liquidity measures. The SNB cannot fill that hole without catastrophic consequences.
Anyway I have a question: If the SNB actually goes to a policy of negative interest rates as has been rumoured - could this cause some kind of physical or digital bank run? EG Why hold cash in the bank and pay X% when you could just stuff it under the mattress? Ordinary Swiss people are not going to stand for being taxed at the bank. Must there be some kind of cut-off and if so then won't the loopholes start appearing - unintended consequences and all?
if you can give it some thought it would be appreciated as this negative interest rate thing has got me thinking.
Many thanks in advance,
Well, that would explain the wacky currency graphs on http://www.24kt.us/cur
My understanding is that Forex is a zero-sum game, so which currency is being bought (or is it Gold)?
#Yet every central bank is attempting essentially the same thing. They are #trying to buy time.
i'd not go that far to say 'every central bank'..
almost all central banks are tyring to cheapen local currency..
strong currency is problem for what: commds based (Braz/Ausrtralia/etc)+ carry trade countries (Japan)+ fundamentally strong countries like Switzeland..
and i'd hardly call strong currency is bad , esp for countries that import lots of natural resources like Japan/Switzeland/etc, its blessing..
if you remember Bruce, not long time ago US official policy was strong $$$ , not weak..
of course, exports is in problem, tourism is bad.. but strong currency is pretty big leverage for outside investing.. think in Zwitz terms : almost everything is USA is cheaper in half to buy in Swiss franks...
i'd call it bargain..
alx
"the best i ever had" that bargain?
short chocolate and watches.
Currency War Bitchez!
"If a trader has a short Dollar/Swiss position of $100mm (a modest currency position for these folks) the cost of holding it is now $25,000 a week. This cost was zero two weeks ago."
My wife's roots are Swiss and as you can see, the Swiss are not into half measures. The 400 percent surge in Swiss bank reserves is likely to seriously distort that country's economy. I wonder if the Swiss CB will load up on gold. Are there any other European currencies getting a big surge? I would think Norway, with its huge oil reserves and stable political climate might be seeing record purchases of krona.
Still kicking myself for closing a short at 550 percent up when another day would have left me 1800 percent up. Live and learn. Beware of the CB's.
<<< Still kicking myself for closing a short at 550 percent up... >>>
Don't kick yourself too hard. You made a nice profit. Nobody can time these crazy markets, because what is happening is not rational.
where are the Swiss going to get the liquidity from with which to devalue? The yen on the other hand is a whole 'nother story.
Pallets of butt wipe er, um... I mean cash in the basement?