Thursday, January 15, 2015

The Swiss Currency Tsunami?

Alice Baghdjian and Silke Koltrowitz of Reuters report, Swiss central bank shocks markets with currency 'tsunami':
The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the safe-haven currency soaring against the euro and stocks plunging amid fears for the export-reliant Swiss economy.

Only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to prevent the strong currency leading to deflation and a recession, as the cornerstone of the bank's monetary policy.

The U-turn sent the franc nearly 30 percent higher against euro in chaotic early trading. It came a week before the European Central Bank is expected to unveil a massive bond-buying program that might have forced the SNB to intervene repeatedly to defend the cap.

"Today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country," said Nick Hayek, chief executive of Swiss watch firm Swatch.

SNB Chairman Thomas Jordan denied at a news conference that the move amounted to a "panic reaction", saying the cap had been scrapped because it was unsustainable.

"If you decide to exit such a policy, you have to take the markets by surprise," Jordan said.

As it removed the upper limit on the currency, the SNB sought to discourage new flows into Swiss francs by pushing down its interest rate on some cash deposits held at the central bank by commercial banks and other financial institutions.

After taking the rate into negative territory last month for the first time since the 1970s, it cut another 0.5 percentage points on Thursday to -0.75 percent, a move Jordan said would help ease upward pressure on the franc over time.

"The values we currently see (on currency markets) point to a massive overvaluation of the franc. They should come back down to more sustainable levels," Jordan said. "Markets tend to overreact when confronted with such a surprise."

Earlier this month, Jordan described the cap as "absolutely central", while SNB vice-chairman Jean-Pierre Danthine said on Monday it would remain the cornerstone of SNB policy.

"In my opinion, this damages confidence in the Swiss National Bank that has always been saying it can keep up the minimum exchange rate," said Alessandro Bee, economist at Swiss bank Sarasin. "I see big risks in this."

In what now looks like a signal the move might be coming, Ernst Baltensperger, an influential academic and former SNB adviser who is close to Jordan, said last weekend the SNB should move away from the "temporary" cap.

Leading newspaper Neue Zuercher Zeitung described the move as "unavoidable".


On social media, however, it was dubbed "Francogeddon".

With more than 40 percent of Swiss exports going to the euro zone, a strong franc is a nightmare for leading exporters.

Swiss shares tumbled over 10 percent, putting them on track for their biggest one-day fall in at least 25 years and wiping about 100 billion Swiss francs off the main index.

Banks UBS and Credit Suisse were both down over 10 percent at 1315 GMT, while Richemont, which owns luxury watchmaker Cartier, and Swatch were the biggest losers, down roughly 15 percent.

Christian Levrat, president of the left-wing Social Democrat party, called the move "a serious threat for tens of thousands of Swiss jobs".

As markets tumbled, people rushed to banks to change money.

"I've never seen such a drop in one go, it's huge. People will probably be buying euros, but also dollars and other currencies," said one UBS teller, after selling euros to a Russian client.

Investors have been sweeping up the Swiss currency as the ECB considers printing money to buy bonds, or quantitative easing. Europe's showdown with Russia over Ukraine has also put pressure on the euro and made the franc more attractive.

In addition to lowering the sight deposit rate, the SNB said it would expand its three-month Libor target range to between -1.25 percent and -0.25 percent, from a previous range of -0.75 percent to 0.25 percent.


Swissquote analysts Ipek Ozkardeskaya said recent heavy interventions to defend the cap may have forced the SNB's hand.

"Given the pressures on the EUR/CHF, an accidental break of the floor would have been more serious for SNB credibility," she said, adding that panic around the franc was likely to continue until the SNB unveils a "new game plan".

In the first minutes of trading, the franc broke past parity to trade at 0.8052 francs per euro before trimming gains to 1.0255.

Fitch's managing director of sovereign ratings Ed Parker said the move would not affect Switzerland's top-grade rating.

"Clearly a change in monetary policy is an important event in terms of looking at what is going to happen to the Swiss economy but it is not a sovereign rating issue at the moment."
Phillip Inman of the Guardian also reports, Markets in turmoil as Switzerland removes currency cap:
Currency and stock markets were thrown into turmoil across Europe on Thursday after the Swiss central bank stunned traders by scrapping a cap on the value of its currency against the euro, sending the Swiss franc soaring by almost 30%.

The Swiss stock market plunged by 9% – its biggest fall since 1989 – as its manufacturers face what one leading business boss described as a “tsunami” of pain from higher export costs. The tourism industry will also be hard hit as the cost of holidays soars, with a sharp decline expected in bookings to Alpine ski resorts at a peak time for the industry.

The euro declined to 0.80 francs before recovering slightly to stand at 1.03 francs. The franc also gained 25% against the dollar to trade at 0.89 francs per dollar.

Dave Madden, an analyst at currency dealer IG, said equity markets had been shaken by the Swiss move. “Markets are still struggling to puzzle out the full implications, but the sudden drop in equity markets as well in the foreign exchange sphere shows that the move caught everyone off guard.”

The rise in the value of the Swiss franc came in early trading after the Swiss National Bank’s chairman Thomas Jordan said in a statement that the cap, introduced in September 2011, “protected the Swiss economy from serious harm” but was no longer justified.

The bank said the measure, which in effect pegged the Swiss franc to the euro, meant the franc has tracked the euro during a period when it has dropped sharply against the US dollar.

Switzerland is seen by investors as a safe haven by wealthy investors and corporations fearful of destabilising developments in Russia and the Middle East. Investors have also flocked to Switzerland to escape ultra-low interest rates in the eurozone.

Pressure has intensified on the franc since the European Central Bank (ECB) hinted that it would begin flooding the eurozone with cheap credit under a programme of quantitative easing (QE), a move expected to reduce long-term interest rates further and devalue the euro against other currencies.

Opinion of the Advocate General in the case C-62/14 Gauweiler and Others

An advocate general’s ruling this week, likely to be accepted by the European Court of Justice, said the ECB was free to press ahead with bond buying without legal challenge. This intensified speculation that QE was imminent, forcing the SNB’s hand.

The growing US economy, and the likelihood of an increase in interest rates this year, has also pushed the dollar higher, exacerbating the widening gap between the dollar and euro.

At 11.00 the euro was down a cent against the dollar at $1.68 while the pound was up a cent at $1.52. The Swiss stock market collapsed 10%, or almost 1,000 points, to hit 8,205.

With the likelihood of money flooding out of the eurozone in search of higher interest rates, the SNB also cut its deposit rate by 0.5 percentage points to -0.75 as a deterrent to investors thinking of Zurich as an alternative home for their investment savings.

Manufacturers in Switzerland’s northern belt are likely to feel the impact first as their exports to Germany and other eurozone countries become more expensive.

Swatch Group chief executive Nick Hayek described the central bank’s decision to allow the franc to rise, reversing earlier assurances that the cap would remain in place, a “tsunami” for the Alpine country and its economy.

“Words fail me. Jordan is not only the name of the SNB president, but also of a river … and today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country,” he said.

Swiss watchmakers, which are also grappling with weak demand in Asia, are very exposed to moves in the Swiss franc exchange rate because their production costs are largely in Swiss francs, with most of their sales are done abroad.

Shares in Swatch Group tumbled by 15%, while rival Richemont, which earlier in the day had reported disappointing trading results, was down 14%.

Julien Manceaux, analyst at ING Financial Markets, said the cut in interest rates “ensures that the appetite for the franc as a safe haven will remain limited, avoiding a negative shock for the Swiss economy”.

He said: “This should work at least in the near term. Whether, this will still be the case after ECB’s meeting on 22nd January and a likely QE announcement remains to be seen.”
The latest central bank surprise/ panic dealt a massive jolt to world currency markets and wiped $100 billion off Swiss stocks. Interestingly, U.S.-listed shares of Switzerland-based companies rallied Thursday, as the surge in the Swiss franc outweighed the selloff in the country’s stock market.

At this writing, shares of Credit Suisse (CS), ABB (ABB), UBS (UBS) and my favorite Swiss company, Novartis (NVS) are all up on the NYSE. However, Transocean (RIG) fell as oil erased earlier advances, and continues its long downtrend since oil prices plunged in the summer (it was the worst performing S&P500 stock last year).

So why did the Swiss National Bank abandon its cap? Chris Bailey, founder of Financial Orbit, notes the following in his comment:
So why did they do it? Swiss exporters are already complaining and tourists will feel it immediately too in their hotel bills and cups of coffee. That’s not great for Swiss economic growth rates - even if businesses will be assisted by lower interest rates.

In their own words from their press release earlier today the Swiss National Bank noted that:
'The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm..The economy was able to take advantage of this phase to adjust to the new situation'
With due respect to the Swiss National Bank I don’t think any real transformation has taken place at all. What they are worrying about in reality is that as the European authorities appear to have little option but to push the euro down further. Do the Swiss really want to follow the euro down and down and down progressively cutting their international purchasing power? Not at all.

Back in December I wrote about the Swiss gold referendum and noted that the Swiss National Bank successfully indirectly lobbied against the formal introduction of minimum gold holdings on their central bank balance sheet in the name of policy flexibility. They have shown this preference yet again.

What it says about the broader world is that the Swiss have no confidence in eurozone policy - even if quantitative easing is finally introduced as predicted by many at next week’s meeting of the European Central Bank governing council.

In the land of the blind the one-eyed person can be King. In the global economic land of 2015, the Swiss are telling you that it is better not to follow others into the land of devaluation. They want these notes and coins represented below to have real purchasing power.

Increasingly the lines of demarcation are being drawn up. Strong (Switzerland) or weak (Europe, Japan) currency zones. That sounds to me like a recipe for greater shorter-term volatility. So how about the resurgent US dollar? I noted earlier this week increasing corporate complaints about the strength of the US dollar and hence the difficulties that this may cause for local stock market valuations. As the plunging local Swiss bourse shows today there are plenty of trade-offs in big picture policy making today.

Welcome again to 2015 the year of volatility.
And now that the SNB ended the cap, we need to ask if and where it will intervene given the overvalued franc.
eed to ask if and where the SNB will intervene

Read more at: | SNB & CHF
eed to ask if and where the SNB will intervene

Read more at: | SNB & CHF

I had a chance to talk to a buddy of mine who trades currencies and he can give me his thoughts on all this. According to him, a lot of big global macro funds were caught off-guard by this move and had to unwind their franc funded carry trades, which up until recently produced exceptional returns for them (read more about how the carry trade is a multi-trillion dollar hidden market here).

As these global macro funds were forced to unwind, we saw big moves in currencies, stocks, bonds and commodities today because they had to raise money to make up for their losses in shorting the Swiss franc (that's one reason why oil prices initially surged before falling and risk assets, like high beta stocks, got clobbered today).

What are my thoughts? There were definitely signs that the Swiss franc carry trade was a bit long in the tooth. Macro funds got slammed but the more worrying aspect is that we're seeing more central banks panic, which confirms my thoughts in my Outlook 2015, it will be a rough and tumble year.

The two most crowded trades right now are long USD and short U.S. bonds. I agree with the former and think the mighty greenback will head higher, but this will reinforce deflationary pressures which is why we continue to see U.S. bonds rally

In fact, I also agree with those who warn the Fed is too complacent on U.S. deflation damage and I'm betting the Fed will not raise rates this year and may even surprise markets with more QE if a global crisis emerges. If that happens, the USD will get whacked hard (but only after achieving parity with the euro or possibly even higher gains).

Below, CNBC's Sara Eisen explains the move by the Swiss National Bank that shocked the market.

And Jim Rickards, author of The Death of Money, recently appeared on The Exchange with Amanda Lang discussing why the Fed is cornered and won't raise rates.

Listen to his comments carefully but keep in mind my comments above. I think the USD is heading higher but at one point, the contrarian trade will make big money. With the ECB getting ready to crank up QE, we're not there yet.

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