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Swiss to Join the EU – NOT!
Both USDCHF and EURCHF are up on the day by a very big 5%. This is mega volatility. The “book” and cash gains and losses are staggering. Some finance ministers are sighing relief over this. I look it at and just see extreme instability.
No doubt but that the Swissie was overbought against all crosses. Some type of correction was in order. The Swiss National Bank has dumped a ton of liquidity (CHF 90B) on the market. This has pushed Swiss rates below zero. This distortion contributed to today’s reversal. But it was a story out of Zurich that Switzerland was contemplating joining the EU that was the real catalyst for the reversal. Some details.
An SNB VP, Thomas Jordan, had this to say: (my translation and original text)
The SNB may consider a temporary link to the Euro.
Die Schweizerische Nationalbank (SNB) kann sich vorstellen den Franken vorübergehend an den Euro zu binden
This was the sentence that got the markets roaring. The TV folks jumped on this “good news” story. But they left out the next sentence:
A permanent connection of the franc to the euro, however, is not compatible with the laws of the Swiss constitution.
Eine permanente Anbindung des Frankens an den Euro hält die SNB indes für mit ihrem Verfassungsauftrag nicht vereinbar.
For Switzerland to join the EU and abandon the Franc as the national currency it would require a national referendum and a change of the constitution. It was 160 years ago in 1850 that Switzerland established the law that ensured they would be a global reserve currency. That decision has paid dividends to the Swiss damn near every year since. I see little prospect for such a major change anytime soon.
A similar approach was defeated in 2001. At that time the Euro zone was thriving with the reduced inflation and expanded debt market that Euro intergration first brought. The Swiss didn’t want any part of the EU when things were good. It’s very unlikely they would want to sign up when things are falling apart. The Swiss would look at this as a bailout of Southern Europe. That is an extremely tough sell in Switzerland. It would take a year before there could be a vote on such an important change in the constitution.
Shortly after the Zurich report a Paris based NYTs writer, ran with the story. The Times used the same misleading headline.
This story had the same conclusion as everyone else:
A (currency) peg would require changing the Swiss constitution, which has regulated the currency since 1850.
Linking the franc to the euro could not happen overnight, and would face steep legal and political hurdles.
A tangent on this story:
I had the TV on this morning with the cheerleaders at CNBC on in the background. About 9:30 one of the regulars (Pisani?) reports on the Daily Mail’s gaff yesterday and apology today. The Mail ran a story suggesting that French banks were facing liquidity problems. They had to withdraw it today. CNBC’s comment was something about responsible journalism and market rumors. Like CNBC is above all of that.
A few minutes later another (blonde) comes on and leads with the Times headline. She says nothing about the substance of the article. She spins it like this is a “good news” story and even throws out a fabrication she heard someplace that the conversion rate for the EURCHF peg would be at 1.15. With this, CNBC started a massive rumor that ended with one of the biggest movements in the CHF in history.
At the time this lie was told the EURCHF was about 1.04. So CNBC was suggesting the Franc would fall by 10+%. That is a very big move. CNBC added to the panic trading. So much for that integrity thing…
Now my take.
First, I put the odds of a CHF peg at a very low level. I think this was the SNB's way of talking down the currency. They used the press to achieve their ends.
Second, let’s consider what it might take to actually get the Swiss people to agree to abandon the Franc and embrace the Euro. It is also necessary to consider what key conditions the big core Euro countries would insist on as a condition for the Swiss joining their party.
It just so happens that both conditions are the same. The EURCHF would have to be much lower than it is today. It would have to be below par. It would probably require a fixing at .90 CHF per Euro. That would imply that the Franc would have to APPRECIATE by as much as 20% before it would be acceptable to both the Swiss people and the politicians in Brussels.
To get the Swiss to vote YES they would have to be bought. All Swiss have savings. A conversion to Euros at .90 would make them “Euro Rich”. While the Swiss may value their currency independence they also know their exchange rates and a big profit. At the “right” currency rate the vote could be bought.
The French, Germans, Dutch and Italians would be reluctant to let a country into their midst that produces food and goods that would not be subject to tariffs. The French farmers would insist on a high conversion rate. German and Italian manufacturers want to keep Swiss producers at a competitive disadvantage. They too would want a high conversion rate.
So everyone with a seat at the table wants a strong Franc (Swiss industry would squeal, but they don’t vote. The Swiss farmers would get rich).
When CNBC threw out the fictitious rate of 1.15 it added gas to today’s market frenzy. I don’t doubt that someone heard this number being bandied about. I wonder if it was not from some Swiss journalist rather than a financial person. A Swiss could look at this from their perspective. 1.15 can also mean the numbers of Euros each Swiss Franc would convert to. In FX markets we think of EURCHF. Swiss people think of it as CHFEUR. Just for the record, 1.15 CHFEUR is the same as EURCHF at .8700.
I’m at all sure what comes next for the CHF. We are in very unstable times. I see no reason why stability is going to show up tomorrow and stay for a long visit. What I do know is that the talk of a CHF peg is very premature, I know that if it were to happen it would have to be at levels much lower than exist today. I also know that one should not get their thinking on FX from the touts nice folks at CNBC.
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LOL everyone here is debating on something that will NEVER, and i repeat NEVER happen.
how many times we voted no to Europe when things were good? and now that all is falling apart we should go for monetary union with EU?? hahaah nice joke, really....
Switzerland should instead join China,the OPEC and Norway as they have in common 1.) positive trade balances and 2.)solid fiscal position. The EURO is about throwing good money after bad, or misery seeks company! You can choose!
The problem is that we mainly export goods to the Eurozone and they import well educated people to us. We can not run away from that. They are our neighbours...
Does Switzerland need such friends?
Good question. But the fact that they surround us just leaves us with the choice either to be friends or enemies... We can´t isolate ourselves. That won´t be beneficial.
you have such a narrow wiev of things mate...
would be benefical destroying our country in the name of international banksters socialist puppets idiots?
HELL NO!
we the swiss will never join euro currency or failing europe system. remember how was the situation in the second world war? we were completely surrounded by axis forces. BUT we're still here.
NEVER forget what struggles passed our ancestor to give us a free and true democratic country!
HAIL HELVETIA
"First, I put the odds of a CHF peg at a very low level. I think this was the SNB's way of talking down the currency. They used the press to achieve their ends."
That's it. End of story. Everything else is just crap and exaggeration compounded by reverse crap and exaggeration. I posted earlier somewhere (http://www.zerohedge.com/news/time-magazine-ftw#comment-1551116) that it does make sense for the Swiss to consider pegging the CHF to the Euro to sustain their exports to their largest market, and export partners in the EU. But for them to consider joining the EZ is beyond crazy and I doubt anyone actually said that.
Great idea, tie your whaleboat to the Titanic.
Everybody here doesn´t understand the legal structure of the EU.
The monetary union is INDEPENDENT of the political union. The EU is not a country but it´s a supranational organization.
Given that, a country can actually peg it´s own currency to the EUR WITHOUT beeing member of the EU... These two things don´t nessarily come together. Nobody in switzerland even discusses a EU entry. It´s only about managed exchange rates.
I agree, this is frustrating. 50% of the comments are only half-baked because this blindness to how the EU and the EuroZone are structured.
Sometimes I think all this "the EuroZone is doomed" calls are more a sign of frustration which should be translated to "I don't f%*ing understand the EuroZone, blast them".
A temporary peg of the CHF to the Euro - a "soft peg", could be the preferred solution of the SNB for a while. But please, talking about Switzerland joining the EuroZone without joining the EU? Unofficially, perhaps, by a peg. Surely not legally, since neither a referendum nor a change in attitudes in the EU can be seriously envisioned. And pegs are even more the objects of speculative attacks at the current, credit-flush times.
I think the soon-reelected Swiss Parliaments will start to talk about reducing the assets of the SNB, either by an introduction of an ADDITIONAL new gold-backed currency or by ordering (legally possible) the SNB to start financing/preparing some rescue funds for the two TBTF giants CS and UBS.
Yep, my impression is that a lot of Americans here at ZH have no clue about how Europe works.
The best proposal to fight the CHF-strength i heard so far is setting up a sovereign wealth fund that uses the fx reserves from fx interventions to invest abroad. Basicly doing what all the oil countries (Saudi-Arabia, Norway etc.) do.
Absolutely - but that's probably difficult for political reasons. After all, SVP already called the summer 2010 Euro interventions "speculation"...
Interesting article, Bruce - as always. I think this has been a pretty successful move of the SNB to plant these peg rumors. We'll see how long it will last.
The one thing that most commenters here fail to understand is that the Swiss people want a weaker currency. If 60% of a country's GDP come from exports - most of those to Eurozone - then a massively overvalued currency is not desirable. Especially as prices of imported goods have not really gone down as a result of inefficient markets. Sure, it's nice to drive to Germany and buy your groceries for way cheapter than at home but a lot of companies have already asked their employees to work longer hours to make up for the decreased margins, growth is slowing and unemployment will most definitely rise.
Yes right Bruce, Switzerland joining the EU might be difficult involving a lengthy political process.
But we could let the EU join Switzerland. I mean their money is already here in our banks. Their elites have long ago defected and are working in Switzerland or own property here. Now, we just would have to transfer the PIIGS.
And on another note, yesterday was the proof that Gold is the best insurance against the follies of the Clowns at the helm the CBs.
I had one of my biggest up days (financially) in my life when Gold soared 40+ in SFR on - wait - a down day. Thanks to the SNB.
As you say Bruce no way to peg the SFR permanantly. But we all now even impermanent pegs can last a very very long time.
So nevertheless the SNB is trying to accomplish single-handedly what Hitler couldn't: Anschluss ans Reich.
And what's even more surreal: Virtually everybody across the spectrum of press and parties in Switzerland is applauding the moves of the SNB to weaken the Franc.
Well, at least the SNB is honest and does not talk about a "strong Franc policy"...
The situation is absurd. What can I do?
Waiting for Go(l)dot?
Yes, and in the meantime maybe I should just go on talking to myself...
"A conversion to Euros at .90 would make them 'Euro Rich'." ---- for 6 months! If Germany, Finland, Austria - I guess France, if they can survive the shock devaluation of their current piigs holdings) - do not seperate themselves from the current "Euro", the EUR/CHF will see .75:1
Net effect is gold-positive.
A must read, from Alfonso Tuor in today's "Corriere Del Ticino" (Swiss newspaper)
'What To Do When The Currency Is Too Strong'
With Google Translation:
Alfonso Tuoro - In our country, the debate rages on measures to curb the rise of the franc, now a whisker away from parity with the euro. The theme is dealing with the Federal Council and has long dealt with by the National Bank decided to enter new liquidity into the system. All are aware that the tools at our disposal are few and that some may have dangerous side effects. Before considering the merits of the many proposals on the table, one needs to analyze the reasons for these currency turbulence.
Alfonso TuorThe descent of the value of the euro and the U.S. dollar is not a temporary phenomenon that will only last a few months, and therefore can conflict with short-term emergency measures. The great weakness of the two major western currencies is rather the expression of a crisis that today seems more difficult (if not impossible) to stop. It began with the collapse of the stock at the beginning of this century, continued with the collapse of U.S. real estate market and the consequent collapse of the Western banking system, now focuses more on the banking system and financial markets believe that the right not to be able to support a restructuring of the huge public debt accumulated by the Member. The next steps are clear: the complete loss of confidence in currencies and finally the crisis of our democratic systems. This means that the day of release is not far from Germany, Holland, Austria and Finland from a euro currency countries will remain weak and that Europe will continue to depreciate. Across the Atlantic will continue to weaken the dollar, because with the next relapse into recession in the United States the Federal Reserve will resume printing huge amounts of new dollars. Therefore, it is easy to predict that the euro and dollar continue to depreciate against our ex.
Against this background, the battle to curb the rise of the franc should not burn cartridges needed in the near future to cushion the impact of this crisis in the Western world. You should also avoid using tools that produce poor results, but at the same time threaten to destabilize the economy of our country. And this is the great danger of monetary policy moves so far suggested. In this perspective, the decision of our central bank to increase the availability of liquidity to satisfy the hunger of CHF is likely to produce poor results on the exchange rate of our currency, but to have the perverse effect of further inflating the bubble to real estate. His blast would have serious consequences for the economy of our country.
The proposal to attach the franc to the euro or to set up an exchange rate of the franc to the bitter end that would be defended by the National Bank is a repeat of what has made our central bank when he tried to prevent the euro descended below 1.40 francs. The purchase of a hundred billion is not enough to prevent the fall of the single European currency and have produced billions in losses. Take this road again today probably would not lead to different results. Moreover, since the amount of euros would then be used to purchase purchased European titles, the SNB would make a second fund-saving European States with the risk of accumulating losses not only on the franc but also on these securities. On the other hand, proposals for the franc or negative rates of tax on purchases of Swiss francs are not feasible, since most of these operations takes place abroad.
All this does not mean that we can not and should not do anything. It means only that when a dam collapses (and this dam carries the names of euro and dollar) is not advisable to try to stem the tide of water flowing downstream. However, it is best to try to take cover and prepare to take measures that help to protect life. Among these, the most obvious is that espoused by the Federal Council, which wants to put pressure on importers to reduce prices of imported goods. But, taking into account that the sectors most affected are tourism and the superfranco export industry, there are others that you might begin to consider. Do not use the power of the SNB to print francs to faint in the defense of an exchange rate and whether to fund the European countries, but to suspend the VAT for hotels and restaurants, restoring breathing to tourism, to finance large tax cuts to businesses industrial, binding them to move abroad to ban production and research to cantons and municipalities to pay next year as profit-sharing (although the budget of the National Bank will close at a loss) to avoid restrictive fiscal policies that accentuate the effects of brake products the strength of the franc and the next recession in Europe and America. Paradoxically, this misuse of the brand of the SNB could dent the confidence in the franc and thus curb the strengthening. Moreover, it is already doing for some time as central banks in the United States, England and Japan. These ideas are certainly unorthodox, but justified by the exceptional nature of this crisis, which will most likely also at the end of the process of globalization and European integration. From this perspective it would be appropriate to begin discussing a unilateral suspension of the bilateral agreements on free movement of labor to prevent the worsening of the labor market is highly aggravated by a wave of European workers driven by rising unemployment in their countries and by the irresistible attraction of a stipend in Swiss francs.
These are just some ideas definitely questionable. However, it is difficult to stop the run-up of an ex who is running even faster than gold, which is the ultimate safe haven. Or rather, it is impossible to prevent the race to the bottom of a euro, now comatose, and a dollar to drift. So it appears wiser to focus efforts to reduce the negative effects of these processes.
http://www.cdt.ch/commenti-cdt/commento/48945/che-fare-con-la-moneta-tro...
Thanks for this. This is a very hot topic in Switzerland. They are getting squeezed because they are successful. Their problems are being exported by their neighbors. No wonder they are pissed.
..you're welcome Bruce, and it's not the first time they find themselves in this situation. Here is a link to a short article and video explaining what happened back then in 70s... Congratulations for your article!
http://www.swissinfo.ch/eng/multimedia/video/Deja_vu.html?cid=30869088
A move to join the EU or even to peg to the Euro would seem to be completely at odds with the last thousand years of Swiss custom and culture.
The move in the SFr (I remember getting 1.81 for a dollar back in 2001 or thereabouts) is puzzling, exacerbated, I think, by a combination of emotionalism and the fact that the SFr is a very small market. If memory serves me, I recall reading that the SNB dumped half of its gold holdings back around 2000-2003. On top of that, I see that the two major Swiss banks hold assets that equal some 500% of Swiss GDP, which makes BAC (at about 20% of US GDP) look like a neighborhood S&L. Given that Swiss banking exposure to emerging markets represents 25% of total Swiss GDP, the country doesn't exactly scream safehaven. Then again, what country does?
"A temporary Swiss franc peg with the euro is within the range of options that policy makers may use to stem the currency’s record-breaking rally, the SNB’s Jordan said in an interview with the newspaper Tages-Anzeiger today."
“Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” Jordan said.
http://www.bloomberg.com/news/2011-08-10/yen-strengthens-on-concern-over...
This implies more direct intervention. The SNB has lost 10s of billions doing this already. This is a very big deal in Switzerland. I don't think the SNB could make a stand in the market at ANY level. They could be forced to absorb 300b worth of Euros/ Dollars. They can't do that.
the monetary revolution has begun! www.silverrevolucion.com
There's a big difference between a small spritz of starting fluid into the carbuerator barrel and dumping in the whole can!
Bruce Krasting, excellent piece. It looks like the euphoria is wearing off and the peasantry are back in, covering their longs at a failed wishful thinking strategy of Switzerland, of all places, joining the EU at this moment in time.
The Swiss could be bought into joining the Euro with an EURCHF exchange rate of 0.9 ?
I doubt it. It would give them a one-time gain in exchange for ongoing losses.
Switzerland has such a high price level, what do you think would happen to profitabilty of farmers, retailers, and many more? And medium term this would also seriously suppress rents and housing, restaurant and hotel prices.
What would Switzerland do with their, so far, very low VAT.
One can for sure come up with many more issues...
Scheisse Sprach Schweiz
Not so sure Germans want the Swiss to join. So far the Swiss Alps are still considered a tax free safe haven for money.
But the Bundesbank / SNB are joined at the hip right ?
The German state is of little consequence until they start coming up with ideas such as Mefo bills and such.
Bruce, who moves these markets? Is it all the traders who listen to CNBC, or is it hedge funds and banks, who presumably will see through these rumors that you point out.
The market did move.....
gh
They should join their German and Austrian Brethren - come and join the EU and the great EURO project. You won't regret it. /sarc
Or maybe the Germans would like to join the Swiss currency regime? In a heartbeat I suspect!
My German/Swiss is a little rusty but i thought it had a second perhaps unintended "we will not attach ourselves to Al Franken's monster" refrain in the statement. I'm curious what your thoughts are on this.
Yes , that was low quality bullshit but what about this little piece ..............
http://ftalphaville.ft.com/blog/2011/08/11/650656/when-a-government-bond-becomes-a-giffen-good/
The tech stuff is out of my league - but I seem to sense they don't want any paper as a triffen good - just Gold - although the FT uses cryptic language whenever the logic flows to the shiny stuff.
Although I have a one track mind.
Will the SNB just expand its base to infinity without buying any counter asset ?
I am lost really.
People are interested in the retun of their money, not on their money.
Hence, a low or negative nominal rate.
If that's what "return of" means, that one has to pay for storage, just like in commodity-land, then so be it. (Think contangos and backwardations, etc.)
Second, if Swissy is the tallest pygmy in fiat land, then that's where the storage cost will be the highest, most fitting of the safest, the lowest or most negative rate, comparatively.
All else assumed as per the FT article and others, is imaginary.
It's a flight to quality, incarnate.
Indeed, a great measure of "panic" or at least investors loss of confidence in the rest of the fiat system.
Nothing new, move along.
So it is possible that they could print the Franc to near infinity and not get inflation.
Just as dollar / euro credit is entering a blackhole - base money Francs comes out into a new monetory dimension.
Me thinks this is going to get very strange.
Of course it's possible. No wait--it's IMPOSSIBLE. Wait a minute...let me refrain that
http://www.youtube.com/watch?v=C2VMqQ6XnmI&feature=player_detailpage
clearly the Swiss have their work cut out for them. All trading strategies should be employed--leave nothing on the table...or the horse.
Oh shit yeah, they keep doin' what they've started it's a mere matter of degree. Who's the tallest pygmy, who's shit stinks the least, in fiat land.
Now I am solidly of the belief that too much money ultimately causes inflation. With the proverbial but; it seems to have yet to surprise to the upsiad for example, in Japan. 15 years of QE..... Ultimately is not a defined term within the space of noral time measurement.
So, I can see the environment. Enough rissk that investors remain sheltering cash, pay the nominal and Real storage charges, or alternatively send the fiat on goods and services prior to the reise in the general price level if no finacial asset will offer a real return or, retreat (advance) to an alternative store of value such as gold which is expected to procuce such.
Excessmoney growth and low or collapsing price structure? Sure. Called a liquidity trap.
Withen a few years it will be forever known as the Cuckoo Trap.
http://www.youtube.com/watch?v=iC-9s8aR_MI
Scratch , sorry I can't help myself with this one.
www.youtube.com/watch?v=cydkTy6GmFA
ha ha "He is toying with the idea of putting warfare, terror, murder and bloodshed below aesthetics(obviosly homosexual).He could have rephrased it and deduced that the cuckoo clock brought 500 years of democracy, brotherly love and peace...not a bad achievement for a clock.
EMERGENCY EMERGENCY
www.youtube.com/watch?v=VCT43aawYOU
Well, CHF?USD is down about 900 pips since I recommended it a short sale here on the blog. Reading the news is a waste of time. Read Charts instead.
If I were Swiss, I would consider going all Tottenham over this. Just my opinion, but I think "temporarily" joining the EU is akin to "temporarily" joining the mob.
Are any pegs truly permanent? I'm getting a bit tired of all this word splitting going on in order to circumvent law/rules/reality.
temporary
transitory
structured default
technical default
kinda sorta not being able to pay your bills...but not really
a little bit pregnant
What the fuck?
Don't forget, "contagion" can be a noun.
I'm just amazed. The whole thing on CNBS was a blonde joke about CHF crosses. Jezzzz. Lighten up.
You should have heard Federer bitchin' about it on the tennis channel as well. It was pretty much unprintable--a McEnroe-esque tirade about "heads and shoulders" and "necklines." of course he could have been talking about the girls that keep mobbing him. These events are making everything everyone says seeminly market related now.
Why the FX markets would react to a rumor spun by CNBS is beyond my comprehention. Why the fuck would the swiss want to peg to a monetary union that is barely holding itself together at the seams?
Reacting to any manure spread by CNBS only proves how retarted these markets really are.IMHO (assuming it was CNBS that said markets were responding to in the first place)