The Swiss National Bank Steps Away From the Printer
By Ilene
[With thanks to Paul Price for his assistance.]
In a surprise move, the Swiss National Bank removed the Swiss franc's peg with the Euro and let its currency "float," i.e. let the market set the price. The peg was part of its effort to hold the value of the Swiss franc down, which Switzerland concluded was getting too costly.
The market promptly bid the Swiss franc up around 20%. This sent a wave of repricing through the financial markets Thursday morning.
The move underscores the turbulent state of the global economy. Around the world, smaller economies are grappling with how to navigate the aggressive monetary activism of major central banks like the Federal Reserve in the United States and the European Central Bank
The Swiss central bank had been trying to cap the value of its currency, the franc, against the euro, with nervous investors fleeing the market tumult and seeking the relative safety of Switzerland. But the euro’s decline has been particularly steep — and the rout may accelerate.
The ECB plans to announce a "major new stimulous program next week" which is expected to involve pumping more money into the European economy. This plan is likely to accelerate the flight of money into Switzerland. As the old saying goes, money goes where it is treated best, and right now, that means out of the EU. This move will likely push Swiss franc ever higher, making it even more costly for the Swiss to hold their currency down–more printing of the Swiss franc and buying of the Euro.
The Swiss leaders’ abandonment of its target was taken as a bet that easier money from the European Central Bank is on the way, and potentially on a vast scale.
Winners and losers
The reaction on Thursday was quick and dramatic. The announcement was bad news, possibly very bad news, for currency traders who were short the Swiss franc.
The news is also not good for Swiss exporters who are now suddenly less competitive in the worldwide marketplace. Products made in Switzerland and shipped to other countries will cost more–the price of the Swiss exports just went up about 20%. This makes the Swiss producers less competitive than they were on Wednesday.
And if you have a loan to be paid off in Swiss francs, the cost of your loan just shot higher. (See the Bloomberg article below.)
For those holding Swiss francs and who are not depending on exporting Swiss products, this is good news. Your currency is now worth more. Imports will be cheaper to the Swiss consumer buying with francs.
Some Background
Since the financial crisis in 2008, the price of the Swiss franc wanted to go higher. Unlike the Central Banks of other countries, the SNB didn't need to print money. Its currency was sounder, its balance sheet stronger and the Swiss economy was doing well.
So naturally, the Swiss franc was trending higher and would have continued rising if pricing were left to market forces. (The drop in interest rates today illustrates that point.) However, the SNB decided to intervene by pegging the Swiss franc to the Euro at 1.20 in 2011 in order to help the country's exporting companies and the neighboring Euroland. This peg created the need for the SNB to ramp up its money printing – it was fighting the market forces which recognized that the Swiss franc was in better shape than other currencies.
From 2011 until now, the SNB would print francs and buy Euros to hold the price of the francs down, with a cap on the Swiss franc at 1.20. Because of the high demand for francs, this peg led to more and more printing to hold the price of the Swiss francs down. In a sense, the SNB began a QE program it didn't need. It continued for three and a half years to print Swiss francs to meet demand and artificially hold down the value of its currency.
But today, the Bank decided to exit the madhouse. Why? Because printing money creates inflationary pressures and cheapens one's currency. Presumably, the SNB reached its limit. The balance of pros and cons tipped in favor of stopping. Perhaps because the SNB decided the best support it could give the Swiss economy demanded it switch tactics and accept the negative consequences of allowing Swiss franc to float.
In Paul Price's view, the SNB never should have caved to pressure by the EU to hold down the value of the Swiss franc and this move is long overdue. David Stockman shares that view and suggests that the world is about to get an ugly re-awakening to the meaning of unfettered price discovery (below).
The SNB's action today had a swift and severe effect on the currency market and other financial markets. But this is a beginning. Powerful shifts will unfold from the unpegging of the Swiss franc to the Euro and the intentional and unintentional consequences.
Other thoughts
At Phil's Stock World, Phil writes, Thursday Freak-Out – Swiss Franc Jumps 20% in One Hour!
Holy Crap!!!
The Swiss National Bank made a VERY SURPRISING announcement that they were removing their 3+-year currency peg to the Euro and that sent the EUR/CHF pair from the usual 1.20 all the way down to 0.85 before stabilizing at about 1.02, down 20% in minutes!
Needless to say, hedge funds who made the very usual, very normal short bet on the Swiss Frank are F'd this morning. As the Euro had been very weak recently, there were a large amount of short bets on the Franc (CHF) in expectations of the SNB stepping up their Euro-buying program to get back to their usual 1.20 goal.
But nooooo! They went the other way by 20%…
From Zero Hedge: Jim Grant predicted that the SNB would pull support for the peg back in September.
The Balance Sheet That Ate Switzerland
(Grant's, September 19, 2014) Like a celebrity in flight from the paparazzi, the Swiss Confederation demands protection from its pesky admirers. To beat back the unwanted appreciation of the Swissie, the Swiss National Bank is–once again–vowing to move heaven and earth. Now under way is a speculation. Prompted by a friend (that's you, Harlan Batrus), we venture that the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It's a long shot, to be sure–the options are cheap for a reason–but we judge that the prospective reward is worth the obvious risk.
Curiously, for all the damage that Swiss private banks have suffered at the hands of American regulators, and for all the Federal Reserve's throat clearing about the supposed imminent rise in dollar interest rates, the franc is still, for many, the monetary bolt-hole of choice. To the Swiss, whose exports generate 54% of Switzerland's GDP, it's a kind of popularity they can live without–indeed, they insist, must live without.
So the SNB prints francs. It drew a monetary line in the sand three years ago: The franc shall not rally through the 1.20-to-the-euro mark, the authorities commanded in September 2011. To enforce this dictum, they bought euros with newly created francs (the cost of production of the home currency being essentially zero). What to do with the rising euro mountain? Invest it, of course.
Bruce Krasting has been writing about the Swiss Franc and anticipated this move, although he doesn't appear to like it. From his latest: End of CB Power – SNB Folds:
I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I’m blown away that this has happened today.
Thomas Jordan, the head of the SNB has repeatedly said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.
The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.
Will the Swiss economy enter a recession? Paul argues that even though Swiss exporters will clearly be hurt, the benefit in other portions of the economy may offset the trouble to exporters. To take his argument one step further, a recession is not necessarily a larger evil than continuing to peg the currency to the Euro. And keep in mind, the devaluing of the Euro is likely to get worse from here.
If you are a Pole or Hungarian and you decided to borrow in francs, due to lower interest rates, a world of hurt may be on your horizon. Piotr Skolimowski and Maciej Onoszko write in Eastern European Currencies Dive as Swiss Loan Costs Hurt Banks:
Eastern European currencies tumbled and banking stocks slumped after Switzerland’s move to allow its currency to appreciate stoked concern individuals will struggle to repay loans denominated in Swiss francs.
[…]
The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate is threatening to spur a rise in bad debt as the move raises the cost of paying off loans in francs, including mortgages. Many Poles and Hungarians opted to borrow in francs in the run-up to the 2008 financial crisis because loan rates were lower than for local currencies. Their payments increased as the franc appreciated against the zloty, forint and leu in all but one of the past five years.
“Massive Swiss franc appreciation is extremely bad news for foreign-currency borrowers in central Europe,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed note…
David Stockman writes a passionate blog In Praise Of Price Discovery—–The Market Is Off Its Lithium.
Excerpt:
In a word, the Swiss Central Bank was on the verge of printing itself into oblivion. It had to stop pegging the CHF at 120 before the madman Draghi turned on the ECB printing presses and submerged the SNB’s vaults in a deluge of wasting euros that would have soon reached the tops of the Alps.
Here’s what it had come to. In about 84 months, the SNB’s balance sheet had expanded by 5X. It now stands at nearly 100% of GDP, towering far above even the lunatic monetary emissions of the BOJ.
Had the SNB not finally blinked, the Swiss economy would have been obliterated in a orgy of export sector malinvestment, virulent domestic speculation and incendiary asset-inflation. At length, even Swiss mountainside real estate would have become too expensive for cows and ski lodges alike. (my emphasis)
[…]
Scroll down the Swiss stock exchange lists and find exporters, miners, industrials and techs down by 10-20% in a single day. Is it possible that some of these “names” had been in the portfolios of leveraged momo traders who are now getting heavy margin calls? The Lonza Group life science company, for example, had been up 4X from its 2012 low and traded at 30X. So when today it lost 18% of its CHF value in a heartbeat, it was not just widows and orphans funds which were licking their wounds.
So too the army of carry traders who funded their speculations with zero cost CHF. They were ionized in a nanosecond because they were effectively “short” the swissie. But why not? They believed SNB Chairman Thomas Jordan’s incessantly repeated promise that the 120 peg would never, ever be removed—–and most especially not in the dead of night, without warning.
And at least the professional speculators in the CHF should have known better. Now comes the millions of everyday central and eastern European householders who took out ultra-low interest mortgages denominated in CHF. They too should have read the fine print,…
Once upon a time, the Central Banks took over the financial markets. Their decisions, their surprise decisions, affect the flows of trillions of dollars. Sometimes over night. So when you spin the wheel, hope you're on the right side of the pointer when it lands.
