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Saxo Bank Warns Swiss Franc Tail Risk Is Concerning

Tyler Durden's picture




 

Submitted by Saxobank's Steen Jakobsen via TradingFloor.com,

In a nutshell: The chance of EURCHF breaking the peg at 1.2000 have increased from 10% to 25-30% based on European Central Bank monetary policy, geopolitical risk and a lack of policy choices for the Swiss National Bank. This means that the weighted risk is now 9 figures – significantly up from 2 figures when I did a similar calculation back in 2011/12. ((1.2000-.9000= 30 figures) x 30% = 9 figures of risk) .This means that being long EURCHF no longer is a safe bet and although the 70% chance of the floor being both defended and protected is still high, the tail-risk involved is becoming to concerning.

Swiss Franc feels the love

It’s been a while but now the Swiss franc is yet again the world’s currency of choice. Back in September 2011 Swiss National Bank, SNB, introduced a floor at 1.2000 to the euro. Ever since, EURCHF has traded in a narrow range of plus or minus 2-3% but while geopolitical risk and desperate central banks have been ignored in energy, volatility and risk trading the Swiss Franc has once again become mighty.

There is a big difference from 2011/12 to now. Back then, the SNB reacted to a currency strengthening from 1.5000 to the euro to 1.2000 and then down to 1.0000. The import lines were massive and deflation was a real risk for a central bank known for its inflation targeting.

Today Switzerland runs a 10% current account surplus with CHF 453 billion in reserves and excess liquidity of CHF 317 bn in the banking system. Dutch and pan-European banks are moving money out of the ECB at minus 0.1% to a Swiss bank still paying a positive rate. The liquidity richness creates a massive bubble in housing and any other traded Swiss asset.

Meanwhile the ECB is indicating that it will engage full quantitative easing and even conduct a debasing of the euro. At least that is if you listen to Francoise Hollande and sometimes Mario Draghi.

To make things worse, the SNB has put itself in a corner. It’s hard not to say impossible to pursue: free capital movement, a pegged currency rate and trying to run an independent monetary policy at the same time.

You can run one or maybe even two, but not three. Just ask China, England before 1992 or any pegged currency central bank.

Three choices

1. Let the floor go…

 

2. Adjust the rate down slowly if capital inflow and revaluation continues

 

3. Accept further bubble like housing and equity markets.

To let the floor go directly without a fight is not going to happen. SNB President Thomas Jordan underlined the commitment in NZZ am Sonntag: ‘the peg is absolutely central to ensure adequate monetary policy in Switzerland – economic outlook having deteriorated. "
 
From a historical perspective, few pegs work. Just ask the Bank of England – I am old enough to remember the unpegging of GBPDEM – mind you – we all wanted to sell GBP, not buy it!

When you fix anything in an economic system you reduce your amount of freedom. Ironically the SNB has limited its own freedom voluntarily by pegging its currency. Now the anchor currency, the euro, desperately needs to weaken due to its own limitation. One euro for a vastly different Europe. It’s from this inability to move both in Switzerland and in Europe, that the bigger risk stems for EURCHF traders.

The timing of course is everything – the pressure is building week by week, but personally I doubt anything happens before the AQR – the asset quality review of European banks. I know for a fact that privately, SNB officials are concerned about the results and in particular for the German banking sector, so a strong CHF was expected, but not this early.

SNB is no longer alone in deciding whether the EURCHF pegs stays, it depends on ECB, Draghi, Vladimir Putin, and a number of other factors outside its jurisdiction. That’s the real difference and the real risk in EURCHF.

There is nothing more beautiful than love except when it’s unwanted.

 

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Wed, 09/03/2014 - 10:38 | 5175429 LawsofPhysics
LawsofPhysics's picture

< sigh > it's still a fiat world.

Wed, 09/03/2014 - 10:59 | 5175497 Buckaroo Banzai
Buckaroo Banzai's picture

This seems like an interesting time to speculate in currencies. It always seemed like a black art though.

Wed, 09/03/2014 - 11:02 | 5175507 Pinto Currency
Pinto Currency's picture

 

 

The southern European economy is decimated with the north rolling-over and Saxo talks about the Swissi?

Wed, 09/03/2014 - 11:52 | 5175732 ThirdWorldDude
ThirdWorldDude's picture

That's precisely why Saxo talks about CHF. 

Those lucky bastards holding francs are about to find out their fiat (un)expectedly buys moar goods.

Wed, 09/03/2014 - 12:17 | 5175877 reset71
reset71's picture

I am also interested in diversifying into currencies.  If you want safety, think of governments that currently stick to better economic fundementals- Canada, Australia, Euro?, Swiss Franc?.  If you want to speculate, go for countries that seem unpredictable, but may come out ahead of the US, Russia for example. I think gold and silver, in physical possesion, should come first.

I am new to this and will only be risking a small amount of money.  I think "cash" is only supposed to be like 5% of your portfolio anyway, so don't overdo it.  Stocks, Property, Bonds, PM should take a larger part of the pie.  

Wed, 09/03/2014 - 10:42 | 5175444 himaroid
himaroid's picture

Deflation is making reserve currency holders smile. More opportunities coming to convert them to precious at better prices.

Wed, 09/03/2014 - 10:42 | 5175450 LawsofPhysics
LawsofPhysics's picture

Good to see another optimist.

Wed, 09/03/2014 - 11:05 | 5175522 disabledvet
disabledvet's picture

Currency trading at the expense of rational economics? Yeah, okay.

The consequences of denying the existence of data are legion where I live. Entire Cities lie in ruin while Statist clowns blow shit out their ass. "All without firing a shot."

Sorry but I'm not going long and strong Switzerland. Sweden maybe...

Wed, 09/03/2014 - 12:07 | 5175816 LawsofPhysics
LawsofPhysics's picture

neither am I, but I will by productive assets so long as I can with that currency.  That's the fucking point.

Wed, 09/03/2014 - 11:06 | 5175515 hairInTheSoup
hairInTheSoup's picture

one thing to keep in sight is that swtzerland is a small country surrounded by the euro with most of its big cities close to a border.

 

already most of the swiss from this cities are driving a few kilometers past the border for most of their retail purchase = if they let the floor go for good they'd litterally kill the swiss retail sector & government income on vat.

 

i don't see how that can happen.

Wed, 09/03/2014 - 11:15 | 5175575 Ghordius
Ghordius's picture

+1 and don't forget the Swiss machine parts industry that is tightly integrated in the eurozone's, for example. or Swiss tourism. most of the supplier's price lists I get from Switzerland are... in EUR. I questioned that, they tell me that it's useless to even print CHF prices, demand is set by (and in) EUR prices

Wed, 09/03/2014 - 11:37 | 5175677 hairInTheSoup
hairInTheSoup's picture

to note also all those various businesses crashing if no more floor might actually create more unemployment... in eurozone than ch (so many foreigners from the borders area commuting everyday to work in ch, i guess they'd be the first to go)

Wed, 09/03/2014 - 11:05 | 5175517 Urban Redneck
Urban Redneck's picture

Option 4. Order the SNB to buy up every tangible and equity asset in sight in the Eurozone... (which sends the excess money supply right back from whence it came)

Wed, 09/03/2014 - 11:06 | 5175531 hairInTheSoup
hairInTheSoup's picture

this

Wed, 09/03/2014 - 11:13 | 5175559 Ghordius
Ghordius's picture

fine, but is it coming from the eurozone? I still think - like David Stockman - that most of it is excess QE3. see here. and imho all this Hot Money is anyway sloshing back to the US

Wed, 09/03/2014 - 11:33 | 5175661 Urban Redneck
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I have no idea exactly where it's coming from, but buying up US domiciled multinationals also works, as long as their customer base isn't US-dominated.

The SNB has the data to determine where the money comes from, and their present "containment" doesn't protect the real Swiss economy, so more active dissuasion is needed, since accepting this global funny money is the current price of maintaining the status quo, they might as well setup to survive and thrive when the funny money stops being so funny.

Wed, 09/03/2014 - 11:43 | 5175695 Ghordius
Ghordius's picture

as far as I follow and understand the SNB's statements and website, they buy EUR to maintain the floor, and then... rebalance, which means buying USD, GBP, etc. with EUR. I also understand they set up operations in Singapore in order to cover better their night shift

are you wishing Switzerland to burn all bridges to the US? alas, that would have been a quaint idea before all the mess that UBS and Credit Suisse created

there is only one way to thrive when funny money stops being funny: healthy, balanced trade, which implies valuable exports for valuable imports. And the Swiss, bless their little gnome hearts, know it

Wed, 09/03/2014 - 12:03 | 5175790 hairInTheSoup
hairInTheSoup's picture

their vaults being full of gold (from ww2 for a good part)

the swiss government NOT crawling in debts because of billions spent in defense & colonisation wars

the swiss people not quite aware of what unemployment means

i'd think they don't have much to worry about save that euro floor, so funny money eh !

Wed, 09/03/2014 - 12:06 | 5175813 Urban Redneck
Urban Redneck's picture

You're an optimist. But part of that balanced trade would involve the SNB's CHF coming home to roost. Unlike the rank amateurs at the FED who have only managed to print 1/4 of GDP, the SNB has a half trillion CHF balance sheet for a population smaller than New York City, and an economy less than half that size. Neutrality doesn't exclude self defense, and there's no reason self defense can't be profitable.

Wed, 09/03/2014 - 11:31 | 5175646 hairInTheSoup
hairInTheSoup's picture

(speculation)except that i'd think they don't need any order to do that and are even doing it since a long long time (since they made chf a fiat)

Wed, 09/03/2014 - 13:11 | 5176144 Urban Redneck
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But it's only speculation, and Swiss bankers aren't actually conservative or defensive, they are simply cautious and slow adopters.

When SNB guys start hanging out at Freilager Zürich, then perhaps there would be reason for hope.

Wed, 09/03/2014 - 11:15 | 5175573 eddiebe
eddiebe's picture

Choice 4:  Link the Franc to gold.

Wed, 09/03/2014 - 11:19 | 5175587 the tower
the tower's picture

Or keep buying Euros and buy gold with those Euros...

Wed, 09/03/2014 - 11:18 | 5175581 the tower
the tower's picture

This thing about one Euro for "a vastly different Europe" is such BS... The USA has one currency for a "a vastly different America"... does New Mexico need their own currency so they can devalue? Any other states? Does Detroit need its own currency? Does my neighbor need his own currency?

Wed, 09/03/2014 - 11:23 | 5175612 LawsofPhysics
LawsofPhysics's picture

Stop confusing money with capital and recognize that "reserve status" has its privileges...

Wed, 09/03/2014 - 11:28 | 5175632 the tower
the tower's picture

I'm not disagreeing, I'm just saying that the problems in Europe come from political chaos and corruption (Italy, Greece hello!), banker scum, and globalization, not the Euro.

Wed, 09/03/2014 - 11:44 | 5175701 Ghordius
Ghordius's picture

hear, hear! I don't even have anything to add to that

Wed, 09/03/2014 - 11:57 | 5175771 LawsofPhysics
LawsofPhysics's picture

"I'm just saying that the problems on earth come from political chaos and corruption, banker scum, and globalization, not the fiat." - fixed it for you, gee, thanks captain obvious.

Wed, 09/03/2014 - 12:03 | 5175793 the tower
the tower's picture

ok you're just a clueless troll... 

Wed, 09/03/2014 - 12:07 | 5175811 LawsofPhysics
LawsofPhysics's picture

You are free to present a factual argument to the contrary or shut the fuck up.

don't be such a douche/pussy. 

 

Wed, 09/03/2014 - 12:09 | 5175827 the tower
the tower's picture

For a person who's nick is lawsofphysics you cannot even do basic formulas... 

You just replaced the variable (euro) with another variable with the same value (fiat) and you call me captain obvious??? As I said, you're a troll. Now go back to school.

Wed, 09/03/2014 - 12:32 | 5175930 LawsofPhysics
LawsofPhysics's picture

So, you're mad, becasue we agree?  LMFAO!!!

and by the way, all fiat is NOT created equal.  That was my original point, which you clearly missed (speaking of back to school).

Good luck with that cognitive dissonance.  What an idiot.

Wed, 09/03/2014 - 15:47 | 5176897 Jack4952
Jack4952's picture

Can we first agree on some DEFINITIONS before we start cursing out each other?

fiat (?fa??t; -æt)

n
1. official sanction; authoritative permission 2. an arbitrary order or decree 3. any command, decision, or act of will that brings something about [C17: from Latin, literally: let it be done, from fier? to become] +++++++++++++++++++++++++++++++++++++++ Therefore, can we not agree that "fiat money" and "fiat currency" are any type monetary unit DECREED BY SOMEONE IN POWER (presumably with an armed force to back him up; and historically made "acceptable" by making it the sole means of paying taxes) to be used for the exchange of REAL goods and services? If we can agree on that definition, then ANYTHING that is decreed as the "official currency", whether it is paper, sea shells, talley sticks, diamonds, gold or silver coins, or whatever is "fiat money"? It is the arbitrary decree that makes it "fiat" - NOT its composition. Now, suppose you were stranded with 50 people on a lush island in the Pacific Ocean, NOT on any map and so with near-zero chance of rescue. Further, let's presume that YOU and a few others were an excellent hunter-gatherers. What would YOU trade your food for? For paper money? For gold, silver, diamonds, sea shells, talley sticks or what? On this island, NONE of those things has any "intrinsic value". You might start out with a "barter system", but sooner or later some type of "money" would probably be agreed upon - probably with the stipulation that no one person could become "rich". If a man with a large stack of gold coins DECREED that only gold coins could be used as money, he would be creating "fiat money".  It would not only be backed by gold, it would be gold itself. Thus, some readers might argue, "How can it be "fiat" when it is backed by gold?" BUT on this island, gold has NO "intrinsic value", any more than the sand on the beach. The man with the stack of gold coins would probably be laughed at; or perhaps stoned to death, if he had no skills of value to the group. By group consensus a form of "money" would eventually be selected that could NOT be easily duplicated or found on the island, with the option that a person could still insist on pure "barter" for a particular transaction.
"Fiat" means by DECREE - nothing more, nothing less.

Wed, 09/03/2014 - 19:55 | 5177728 anonnn
anonnn's picture

1. official sanction; authoritative permission 2. an arbitrary order or decree 3. any command, decision, or act of will that brings something about [C17: from Latin, literally: let it be done, from fier? to become]...

"Absolute discretion is a ruthless master. It is more destructive of freedom than any other of man's inventions."

Wm.O Douglas, US Supreme court Justice

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