This morning's decision by the Swiss National Bank has polarized the investing community. From the 'smartest men in the room' to the 'most renowned newsletter writers in the world', the reactions could not be more different...
The SNB Move Is Rationality Itself
- The SNB's move will come to be seen as rational
- Letting market decide FX levels leads to growth and prosperity
- EURCHF should end up trading around 1.000/1.0500
Travelling in Switzerland, I was as surprised as anybody by getting the call that the Swiss National Bank has removed the floor in EURCHF, this despite my earlier research piece outlining that bigger risk but not an actual removal this swiftly.
The SNB has clearly weighted the pro and cons of the floor and decided the negatives were bigger than the advantages. In the medium term and long term this will be seen as not only rational but also as the protection of long-term Swiss growth and inflation expectations. The SNB is effectively acknowledging that the business cycle needs to run its course, the artificial weak CHF had the indirect consequence of inflating an already strong real estate market and placing Swiss monetary policy at the door of ECB.
This is now neutralised and Switzerland sends a strong signal to a country like Japan that the way forward to growth and long-term prosperity is via allowing the market to dictate the currency rate. Switzerland has dealt with a stronger CHF through innovation, productivity and an extensive “Mittelstand” – SME sector.
Japan's "solution" is through exporting its problem overseas. The SNB action is full of rationality and gives hope for the markets and Main Street as accepting the business cycle up- and downside is the only way to mean revert to a better place.
I expect the EURCHF to trade around 1.000/1.0500 as fair value when all is said and done. The CHF is stronger because it is supported by a robust tax regime, an efficient and educated society and an SME sector which is constantly on the lookout for quality and education and is finally now again supported by an SNB which believes in the micro over macro by allowing the FX rate to be dictated by the market.
This does not hide the pain of the surprise for many investors and companies, but it will be a wake up call and a confirmation of our bias that 2015 is the beginning of more volatility.
And on the other hand, Dennis Gartman...
Swiss made "single worst central bank decision in 40 years of watching"
"They promised" they would keep the ceiling...
"This really is I think a silly decision on their part and it has inflicted enormous losses across the world to a great number of people,"
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And on a final note, if you were wondering just how it is that Dennis Gartman - so long derided for being the ultimate contrary indicator (though living high on his oil call for now - insert blind squirel analogy here) - could somehow keep being invited back on to CNBC? Meet Courtney Gartman...