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On the SNB, Once more
One of the greatest bluffs in financial history was pulled over the last week. I’m referring to the Swiss National Bank's “No Peg” decision this morning in Zurich. What’s amazing to me is that the bluff was just that, a bluff.
This started with a middle level guy at the SNB saying that “All options” were on the table to deal with the staggering appreciation of the currency. He included a fixed rate peg in that mix of options. The SNB spoke to all the press. The SNB spoke to market participants. They flat out told everyone that a peg was coming. They lied bluffed.
The notion of a fixed peg for the CH is the stupidest thing they could have done. At some point events would evolve such that Franc would come under speculative attack. That could break the back of the SNB and send the EURCHF 15% lower in a day. This is the Alamo approach. We remember how the Alamo ended. The SNB knew that a peg was a “risk all” bet. I’m sure that they also knew from their own experience and advice from other Central banks and Treasury types that the line in the sand (peg) was a way to make speculators fantastically rich.
I’m of the opinion that there never was any serious consideration for a peg. It was just noise. In support of that view I provide a personal perspective.
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Way back in 1992 I was running a modest slug of leveraged capital. This was a Macro approach. By that I mean we played in major markets looking for big relative changes. Availability of leverage was key to success. FX is max-leverage if you have capital. It was no problem to trade interbank FX and put up only 2% margins. At that level one could have a $1b currency position and it would only require 20mm to play. (There would have to be back up equity available)
Currency markets often move 2% in a day. So the possibility to make (or lose) 100% of your stake in a few hours was a regular event. And that is what I did. Functionally, a $25mm bet. Double it (or more) or lose it in a less than 72 hours. I was a percentage player; this was intoxicating stuff.
One day I get the call and the voice says that George Soros (led by Stan Druckenmiller) was shorting the shit out of the British Pound. That sounded like fun to me, so I joined the fray.
The rest is history. On September 16th 1992 (Black Wednesday) the Pound was devalued. It was very well publicized that Soros made a billion+ on his trade. He broke the Bank of England. My involvement was small compared to George S. I was not the only one who jumped on the Soros bandwagon. The cost to the UK Treasury came to $5 billion. The Soros share was only 20% of the total. Let’s say we all got fat.
All the global CBs were very pissed off about this. It made them look stupid. What Soros (and I/others) cleared was directly off the back of the BOE. Our gain was their loss. The UK/global press had a field day with guy who ran the show at the BOE, "Robin" Leigh-Pemberton. (perfect, no?)
This was a very big deal for the CBs. There was a great deal of internal and external discussion. It went on for years. There was a bottom line conclusion that all the reserve currency central bankers came to:
They could never put themselves in a position on currency intervention where there would be a firm commitment to defend a given exchange rate. (a peg)
The lesson of the devaluation of the Pound was that markets (and big market players) were bigger than the resources of even the Bank of England.
From that point onward there has never been a repeat of the fixed exchange (peg) approach.
CB’s like the SNB and Bank of Japan have been intervening for years. The strategy is always the same for these two. They have played defense. From time to time those CBs have come out from under a rock screaming and yelling and spreading rumors. On many occasions they have resorted to splashy interventions. But that is just noise. The only objective of these central banks has been to slow the inevitable.
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The current head of the SNB is a very nice fellow. Mr. Phillipp Hildebrand. He is an Olympic swimmer. He is a hero in Switzerland for his efforts in the pool. But he’s not a central banker, and he should not be running the show at the SNB.
There are many good former central bankers in Switzerland. There are also a few in Germany who have watched/participated in history. I’m absolutely sure that while Mr. Hildebrand was talking to the press about his idea for a peg, he was also getting some advice from some smarter sources. Who knows? He might have even gotten some input from his friend, DSK. (also perfect)
All of the CBers (both past and present) would have told Mr. H. the same. A peg is a modern day no-no for a reserve currency. That lesson has been learned. One time is enough. Hildebrand should have known this himself. If he didn’t, he shouldn’t have the job. He should never have initiated the peg talk. The "peg talk episode" will be his black eye that stays with financial history.
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Note:
There is no Peg. There is no intervention. So why the hell is the EURCHF at 1.14? Easy. The SNB has flooded the market with CHF. They have increased cash liquidity from 30b to 300b in a week. That is a ten-fold increase. The increase is equal to~50% of GDP. If something like were to happen in the US or Japan there would be some form of explosion. It’s just too much money to hit the system.
As a result, Swiss deposit rates have turned negative. This is reflected in the swaps market. If one wants to be Long Swiss and Short the Euro the position must be rolled over in the swaps market.
The cost of a short EURCHF has become very big as a result. The current spot rate for EURCHF is 1.1400. The six-month forward rate is 1.1270. In other words, the currency pair has to move by 1.1% just to break even. When the equity is only 2% it means that the financing costs eat up more than 50% of your capital behind the trade. Specs don’t like that action.
I'm taking a wait and see for a bit. It’s better to find something else to do than trade the Swissie until the swaps settle down (they will).
It’s impossible to forecast the timing of currency moves with any precision. But I will say that the way the SNB has handled the past ten days has made it a certainty that there will be another big speculative move into the CHF at sometime in the future. I would say sometime late fall.
I say that because the massive increase in liquidity can’t be maintained without consequence. I say that because the SNB has shown a very weak hand. They tried to bluff their way out of a tight spot. They may have bought some time. But that is all they have bought. They have hung a new sign on the SNB headquarters.
We were bluffing
We are just playing defense
We are vulnerable
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PS. Sorry for all these bits on the CHF of late. This has been an interesting tale for me to tell.
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Seems like a classic example of coordinated trading on inside information to me.
delete duplicate post
Sorry Bruce, but claiming that someone in Switzerland announced that a peg was arround the corner is just flat out wrong. I don´t know what your sources are and whether you understand German and/or French or not. So if you relied on false translations, than it´s the translators fault. Otherwise I please you to read the Swiss news more carefully.
As you can see, I told you tuesday that the SNB would disappoint the sky high expectations of mr market. Our policy makers are weak and divided. Don´t expect anything significant until we are once again at EUR/CHF 1:1.
See my statement from tuesday
Bruce,
That to me looks like a climax top. I think at this point everyone will try to justify why the swissie will go higher, why intervention will fail and why every currency is doomed againist the alredy incredibly expensive Swiss franc.
In 6 months we will be talking about who UBS is too big to bail by the Swiss Central bank.
I expect dollar parity in year at latest.
Interesting - and concerning- stuff happening at the microeconomic level at the Swiss-German border. Hordes of Swiss from all over the German speaking regions are descending on the German lakeside town of Konstanz and buying up consumer goods and food like there is no tomorrow, and what's more they can get the value added tax refunded as a bonus. The shops & cafes of the Swiss town of Kreuzlingen just 10 min drive away are practically deserted. In the last 2 years the prices of goods in EUR relative to the Swiss Franc have decreased by 31%. Even gasoline is now cheaper in Germany than in Switzerland. Swiss importers are being accused of pocketing the windfall profits accruing from the improved CHF exchange rate and not passing them on to the retailers. (source: a local South german newspaper, print edition).
But - who gives 2 dry f**ks about the Swiss retailers, shopkeepers and cafe owners? They are just pawns in the game of global competitive devaluation.
How long would that kind of 'arb' need to go on before sentiment about being in th e Ewww tilted?
Impossible to say given the current instability. If I understood Bruce correctly the CHF/EUR may go even higher. Like I mentioned, it's a microeconomic situation. Swiiss goods in the supermarket have always been 20-30% more expensive than German, but there were some compensations -cigarettes, gaosline, some medications used to be cheaper in CH. No longer. There is concern that German nationals working across the border in CH might lose their jobs.
Personally, i never bought CHFs with EURs, still less with 50 x levergae. I just stick to gold & silver.
Thanks Bruce for sharing your experiences with us, very interesting ...
SNB: smells like, desperation.
This was never taken seriously least of all by Switzerland. Weak.
Wasnt a bluff, was an option, and will be delivered. Wait and see.
If a sovereign is just going to pump money into the system in a faux attempt to devalue their currency which we both agree won't work, why don't they do the reverse of austerity and just pump money into social services and sovereign wealth funds? A true Bernank helicopter rain dance. This would seemingly lead to a lower speculative value and also win over the will of the people and exporters alike?
wrong..
swiss dont want to devalue the frank.. they want stop speculative/predatory strengthening by big banks/brokers.
its USA who weaken own currency by printing triliions, its Japansese who weaken yen by printing triliions.
its chinese who are trying weaken yan and/or peg to weak currency to have export advantages..
IT IS NOT FUCKING FAULT OF SWISS THAT EURORE/USA ARE fucked, so people from those countries move currency into swiss frank ..
got it?
#ump money into social services and sovereign wealth funds
that would be stupid idea .. Swiss citizenas are not sissies like here in USA, they are hard working , indepedent thinking people who want own currency, and dont want into any Europe unions
You are so right alexwest
Whose Frank ?
Honestly listening to Americans - the John Birch society has done a good job of brain fucking the average citizen.
Who's Franc?
Bruce - I realize you know this, but the BOE was trying to keep the value of the pound up. The SNB wants the value of the CHF to do down. The former is not always achievable, the latter always is if they go nuclear. Print francs, buy gold. Continue until it breaks. Sooner or later, Japan or Switzerland is going down this path.
Bruce is classical example of : facts and reality are be damned..
alx
Hmm. Didn't sound like you were calling bluff, some days ago...
wow. Bruce. U da man. Keep telling us stuff like that. Very interesting.
interesting but wrong. The Brits wanted a strong Pound and had a weak economy. The Swiss want a weak Franc and have a strong economy. It's a different animal. The Brits needed to deliver Deutschmarks and they had none or few. The Swiss just need to deliver CHF. Guess what's easier....
Today lending costs in fundamentally weak currencies (EUR,USD) and strong currencies (CHF,NOK, CZK) are almost the same. Carry cost therefore zero. So what easier trade than short weak- long strong. Mr.H can walk on his hands, no way to win.
cant be said better..
alx
I see what I was missing above a bit better now! (Although I don't get the sense there's anything sinister in BK's motivations when he writes. Still, who am I to speculate (in any sense of the word...)?)
Love the stuff on the CHF, you helped break the BOE?, as the other poster said, your modesty is impressive. Please keep up the posts, I've learned more at ZH than almost anywhere else. Not just flattery.
HB
Love the stuff on the CHF, you helped break the BOE?, as the other poster said, your modesty is impressive. Please keep up the posts, I've learned more at ZH than almost anywhere else. Not just flattery.
HB
Genau, witer so, Bruce. Ä würklech guete Bricht!
De Bruce isch Schwiizer?
\
Did he really? Last I heard the Bank of England was still in business. Not only that, by 2004 the Pound was back where it was in early 1992 vs the USD.
In the Lawrence of arabia film he sings : I am the man who broke the bank at Monte Carlo.
Maybe Bruce was in on that one too!
no.. no
soros / quantum did that..
it was almost perfect... soros/ druckenmiller whoever came up w/ idea ia real macro genuios..
not those bearded retarted assholes who live in ivory towers and write in NY times..
but point is .. IT HELPED ECONOMY.. 90X-2000X were best years for Brits..
alx
Never underestimate the Swiss. The grew up with 3/4 envelopes in their wallets, swiss franks,french franks ,italian lira. and Austrian currency. They are old hands at the currency game and worrying about the Euro must be a piece of cake. They are kicking the can as they know they only have to buy time as their will be a massive shake up in this playing field over the next few months. They are positioning their players as we speak!
Thanx Bruce, for sharing your experience. BOE 92 was major big time.
Cheers Sir!
I appreciate the openess guys like Bruce bring to open Internet world. All bravado aside, and the simple fact is many of us out here don't have two sticks to rub together, but we like to learn how the world works from all sides. It is a strange world high finance "money for nothing and chicks for free", or divorce for a lot and a huge margin call to boot....
"PS. Sorry for all these bits on the CHF of late. This has been an interesting tale for me to tell..."
What!?!? I'm still living for this stuff.
Thanks, Bruce. You're still the best.
:D
bonjour, you are back! I have a chickpeas recipe for you, if you be vegan!
Don't need to be a vegan (or otherwise) to enjoy a good chickpea recipe!
Anyone who says otherwise has never had a good chickpea recipe!
+10
Aye - zero need for an apology; it's a well told & interesting tale to listen to.
Bruce,
you disappointed me...
that Soros example is bad one.. WHY?
back in 1992 BOE COULDN'T HAVE DEFENDED CROSS pound/g.mark cause RATE WAS OVERVALUED, POUND WAS FUNDAMENTALLY WEAKER,, where was no any economical reason for pound to be strong against g.mark.. BUT BECAUSE OF STUPIDITY BOE DINT UNDESTAND THaT..
kudos to mr soros /Druckenmiller who broked that peg..
AS FAR AS SWISS CONCERNS its totaly diferent..
ITS DRIVEN BY SPECULATION FLOWS.. Swiss economy /frank are better , but not that much..
look at DAX, it fall more than sp500/nsdq.. it was not supposed to be that way.. Germany is way healthier than USA.. Swiss is just little couzin of germany.. almost 100% of correlation.. so ressesion in Europe is on horizont..
i saw you were bragging you worked here and there.. well bruce , place dont make man smarter or stupider, its quite opposite..
let me remind 101 FX economics.. no matter how SNB is gonna keep peg ( swaps/ FX / futures/etc), in the end SNB just must deliver franks amount XXXX, on date yyyy, on rate zzz..
as long as cost of printing is zero, all contracts will executed, and specualtors will get their fresh crisp printed franks on time..
alx
ps
bruce, your words 'We were bluffing, We are just playing defense We are vulnerable' sounds like wolf pack voice..
you know, lets get together and kill some stuff..
hope you wont lose your shirt on day swiss frank reverse..
"The cost of printing money is zero", you say. Only a fool would think that.
I get that it's the inverse of the GBP situation (attempting to keep the CHF weak rather than strong), but whatever the reason for current strength, how does that make a peg any easier to defend? As the article says, isn't it simply a matter of who has the most resources?
SNB has infinite resources.. it prints frank.. isnt obvious?
no matter how much leverage in FX, traders must post collateral , even 2% of equity, and they have risk control..
those frank movement is 9 sigma event.. never happened before.. they sit on pins.. its just accident waiting to happen.
all those 'hissy fits' from mr krasting means one - top is here.. and his wall streets buddies are in need to off-load long frank positions..
dont trust to one word from mouth of wall -streeter.. thet are trained to #uck people.. ITS WHAT THEY DO.. its their job
be cautios
alx
wow, krasting...ur a bigger pc of shyt than i could have ever imagined..
Your jealousy and hate must be bigger than your heart. I am sorry for you.
not sorrier than i am
http://www.youtube.com/watch?feature=player_detailpage&v=a3HemKGDavw
Interesting stuff. Ramble on.
Maybe the SNB has been watching too much liars poker on American TV.
But seriously, was the bluff worth the harm that has been done to their credibility.
It depends on the half life of the bluff (and the squeeze on short-dates). It could be days. I think months, but who knows?