Tuesday, September 06, 2011

Swiss Jeez

We were going to write something on Dax. But the Swiss move has buried us with related stuff.

Here's the SNB statement:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

TMM translation -  If you dare to try and trade EUR/CHF under 1.2000 you will be made to sit on the naughty step.

Some quick TMM thinking aloud -

SNB just announced that they are the World's issuer of currency and liquidity provider of last resort.

This is the boldest response we have seen from anyone during this crisis. They must have been watching Crocodile Dundee .."That's not an intervention.... THIS is an intervention"

SNB have handed monetary control of Switzerland to ECB

SNB have lost control of their balance sheet.

SNB may also lose control of their mandated responsibility towards price stability

Is pegging yourself to a currency that may split in two the wisest thing to do?

Is the act of pegging to euro to be read as a huge vote of confidence in it?

Swiss rates "should" converge with Europe if currencies are pegged.

BUT If you have the choice of buying CHF or EUR assuming that they are pegged, then on a "will it be there tomorrow" front you always buy CHF  

So  that means that interest rates CAN be different and will solely reflect Euro blow up risk plus SNB failure risk.

So that means that the EUR spread over CHF is now the new bench mark of Euro blow up risk. ( CDS like)  

The difference between the market price of  Eur/chf  volatility and zero  should be seen as the Market perception of the risk of the SNB failing.

EURCHF 1 month Vol though off 8 vol is still at 14%

This meant to be unilateral, but is it a clue of G7 intent?

Whether it works or not, this may well be the sentiment turn trigger we need to turn current uberbearish mood.

That move must have been RV hell.

Can all Eur/Chf spot traders please report to HR to arrange more time with their families.

And finally -- Pegs can always be moved !


Игры рынка said...

Because of SNB all swiss people have just lost 10% of their purchasing power. If SNB had any brains then to compensate for the lost wealth instead of euro records at ECB they would buy porsches, ipads and holidays in greece for all swiss nationals and distribute them for free. The effect would be exactly the same. One word: idiots. This just brings the end of era of Central Banks closer to its logical conclusion.

Secret--Sauce said...

Meh, moral suasion at best. Sort of reeks of desperation. (Although good for a nice pop today. Time to fade it?)

Personally, I've always thought it a bad idea to give traders a target. It's like waving red underwear in front of a bull - you wind up with an unpleasant feeling in an unpleasant place faster than you can say Soros.

Anonymous said...

you wind up with an unpleasant feeling in an unpleasant place faster than you can say Soros.

Funny, I thought of Soros almost immediately after reading this. Could be an opportunity to make another billion and bust the arse off a central bank.

Christian H Gross said...

Go ahead and try it... Here is my analysis of why the SNB can keep the peg:



Christian H Gross said...

This is not a soros moment... Soros sold the pound, not went long the pound:


The Treasury took the decision to defend Sterling's position, believing that to devalue would be to promote inflation.[5] On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise.

If everybody went against the CHF the SNB would be happy!!!!

Игры рынка said...

"If everybody went against the CHF the SNB would be happy!!!!"

Something tells me that the mentality of Swiss people will not tolerate this SNB non-sense for long. So if everybody goes against SNB, SNB will be forced to capitulate at some point. Now go and make your bets

Anonymous said...

Soros sold the pound while BOE trying to defend it. Now SNB trying to defend the euro while Eurozone is going bust. I must say SNB is even in a more dire situation than BOE 20 years ago.

Ambointhehouse said...

I know their other ways , but methinks now the time to be pressing harder against the pisstakers lads.

ps....surely this runs only with two legs.

Secret--Sauce said...

Funny how some took one word of my post, out of context, and went in a different direction. My point is that traders, on the whole not a rather intelligent lot, generally shoot in all different directions, mostly at each other. But when you give them a target to shoot at, they work together to write their name in the snow in big letters, and those that erect the targets often get trampled.

Where is the SNB going to get the funds to sell CHF to all comers, Nazi gold notwithstanding? (O, and the right honorable bond king should note that the trade is long CHF, not short.) Is the SNB going to print and print so everyone can switch out of EUR/USD into CHF, i.e., defend the 1.20 Maginot line via hyperinflation? Swiss banking today is not what it was when the secret sauce first began to erupt from the magic geyser, but methinks Swishies will not take such an irrational step.

Ordnungspflicht, anyone?

abee crombie said...

print print print!

i guess they can hold this peg pretty easily if they want, though they will exhaust reserves and getting parliamentary approval for more is not guaranteed but there is nothing to stop this from working.

Good point on the interest rate differentials.

Anonymous said...

SecretSauce: Yes, they are going to print. If you read the statement, that's pretty much what it says (in fact, they already printed - they created something like 80bn in sight accounts recently, and it made not much difference). They basically say "dare us". And, since they don't care about MTM and quarterly reports, they can destroy any trader who thinks different.

They even have political support to do so (which was a bit of 180 turn for some). Our analysts called the peg with almost spot-on timing (their expecation was late last week). I suspect this is the first peg, and would not be surprised the peg moved to 1.30 in not too far a future.

Charles Butler said...

A tad unfortunate, Angela, that there is no eurobond to sop up all that loot.

Anonymous said...

CB: Yes, that's what I was thinking.. Interesting will be to watch impact on Italy bond spreads though.

Nemo Incognito said...

This is beyond retarded. I can see the merits of gunning for CHF but really, aren't the smart money moving into SGD by now? I'd rather get long a safe haven which is cheap than one which is hideously overvalued.

On that point, will the BoJ accept that they are indeed the little man of intervention?

- Long SGDJPY (for a punt)

Amplitudeinthehouse said...

Here I come Voldemort!

Anonymous said...

You guys are missing the point. The snb is not acting alone IMHO. Canadian comment was very interesting hint. Pp: 'we believe in floating currencies but these are unusual times'.. Eur is in need of dollars. Snb is not just buying but borrowing usd to swap. Yes snb is exposed but not alone. I smell a coordinated effort ahead of the G7 comments? I reserve the right to be wrong.

abee crombie said...

nemo, smart money or momo/atari gaming machines?

is there a difference these days? why buy cheap when you can hop on and off trends ;)

Anonymous said...

print swiss francs, buy german car factories and italian fashion brands and then redistribute those to the citizens.

What is so complicated about that?

zeno said...

german industry can no longer use the weakening euro to increase their marketshare.

i guess the swiss will buy gold for their euros.

and in doing so they´ll get the gold virtually costfree.

playing the markets...

if china can peg their currency to the worlds reserve currency, i can not see why switzerland cannot do the same with the euro.

theta said...

Wow, lots of grumpy (dare say sour grapes even) comments here. Guys, first of all, admit defeat and never fight the SNB again. Especially when you are so confused about what happened, as to say such stupid things as "they will exhaust their reserves"!!! Huh? Exhaust??? They are INCREASING their reserves in the process. They are BUYING foreign currencies. They have the monopoly of CHF issuance and they exercising their power. We had this discussion a few weeks ago and I was arguing then that a Central Bank has the ability to devalue their currency any time they want. It's the easiest thing in the world, as they can very easily buy unlimited quantities of foreign currency. I had actually suggested a different method, that if SNB had implemented, they would have made some more money (i.e. sell a naked 1.20 put in any quantity needed until price went to that level, then they would have kept the entire premium).

Polemic said...

Theta I thought of you the moment they announced it re your comments a couple of weeks back and the scepticism they received. Just because your real name is Hildebrand doesn't detract from your glory!

Игры рынка said...

"Central Bank has the ability to devalue their currency any time they want"

No, it has the capacity. The ability is a different thing. Especially in a country famous for its de-centralized decision making. I bet it will not take too long for Hans-die-grosse-packung to realize that he has to pay 10% more every time he goes to the gas station only because SNB is playing its games without asking anybody. Switzerland is not China.

Polemic said...

russian sounding bloke - But that 10% is only a partial give up of the 30% they have recently had handed to them free. In fact we were only 200 pts lower than here a week ago.

Anonymous said...

Hey Theta,

I think I was the one aruging against you awhile back about the inflationary risk of such intervention. But alas I was wrong.

If the SNB really want to be bold and show the market whos the boss, they should

1. Create a SWF with the foreign currency bought.
2. hire UBS and Credit Suisse
3. start making unsolicited offers for large and mid cap companies denominated in EUR or USD.
4. ??
5. Profit!!

Then its a win win situation where they are hedging future depreciation CHF and paying the bankers with the caveat that the fees goes into the capital account.

At least they get something out of it for the future swiss tax payers.

Leftback said...

This move by the SNB may simply be a way of G7 CBs drawing lines in the sand and saying to FX traders: "no, you ignorant horde, you can't simply declare a safe haven currency and then bid it up indefinitely without having to take a red hot poker occasionally".

You can bet this isn't unilateral, but the SNB were "volunteered" to ride out in front of the cavalry and deliver a few warning shots. As many have pointed out here, CHF has been going parabolic for weeks, and it makes sense to deflate bubbles in all asset classes, including FX, before they attain damaging proportions.

Rest assured that somebody else will be taking up the reins within a few weeks or months. JPYUSD isn't quite a bubble yet, but the BoJ is in a very similar predicament to the SNB in terms of the pressure exerted on its exporters by excess safe haven flows into JPY.