We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday – that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.
We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.
But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more
Remember when the SNB stopped defending its floor against the euro in January and the Swiss franc’s value surged? Not so much on Friday:
There is a straightforward answer to the question in the headline: more money has been trying to get into Switzerland than get out, which didn’t affect the exchange rate as long as the Swiss National Bank bought foreign currency. As soon as they stopped, the exchange rate adjusted to balance the new set of flows. But a detailed look at the gross flows in and out of the country provides a more nuanced and interesting picture.
In the heady days of 2010-2012, when it seemed as if the European Project was always one secret weekend meeting away from exploding in a fireball of poisonous politics and innumerate economics, Switzerland looked like a nice place to put your money. It was especially attractive if you were a resident of a stressed euro area country worried about wealth taxes, bank failures, currency re-denomination, or all of the above. Read more
Debate still rages about the merits of last week’s Swiss National Bank move. Peter Doyle, economist and former IMF staffer, argues that the SNB in fact kept its exchange-rate cap for too long — and was wrong to have targeted the euro alone.
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Last week’s Swiss surprise was a useful reminder that betting against currency pegs is one of the classic macro hedge fund trades.
Think Soros and Druckenmiller versus the Bank of England. It’s attractive because the cost of maintaining the position is usually small while the potential upside can be quite large. Someone who had been continuously buying short-dated puts on EURCHF at 1.2 since the establishment of the Swiss National Bank’s exchange rate floor over the past few years would have paid a pittance for the opportunity to make a lot of money. Read more
From an “indefinitely sustainable” regime to a” dirty/ managed float”… Citi’s Buiter is not a fan of the Swiss National Bank’s quashing of its own floor last week.
We know what the immediate consequences looked like and it’d be no surprise if there are more aggressive swings in the franc over the next while, even if the SNB will be in the mix trying to keep things somewhat orderly.
We also know, after a weekend of reading everything SNB, that the reason for the move (coming ECB QE and the prospect of increased speculative inflows are still top of the pile) is asked only slightly less than the question in first place: was this a mistake? Read more
One of the most predictable consequences of the Swiss National Bank’s decision to stop suppressing the exchange rate between the franc and the euro was the whinging of Swiss exporters. That doesn’t mean the policy change was an error. If anything, it may help rebalance the Swiss economy away from its excessive dependence on exports towards greater levels of domestic consumption.
The clue is Switzerland’s ridiculously large current account balance. The chart below shows the countries with the six biggest current account surpluses and six biggest current account deficits: Read more
FT Alphaville’s Retail FX correspondent explains the move:
The raw from Saxo is here for those who want it, via Reuters by way of Hempton:
Due to today’s exceptional market movement in CHF crosses, we have been filling client orders and positions in an extremely illiquid market. Once we are better able to establish true market liquidity, all executed fills will be revisited, and will be revised and amended to more accurate levels. This may result in a worse execution rate than the originally filled level.
As we have already pointed out about Thursday’s unprecedented Swiss franc move following the SNB’s announcement about removing its 1.20 euro level floor and introducing a -0.75 per cent interest rate regime, the real story to pay attention to is what exactly motivated a price surge to that level.
Was it a), that the SNB simply under appreciated the scale of the undervaluation it had been engineering in the franc? Or was it b) that the SNB under appreciated just how thin FX market liquidity is in the market these days?
So as to not sit on the fence, we’re going to take a view and speculate that it’s actually all down to option two. Read more
The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.
Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more
Looking beyond the major currency pairs, remember that question of Hungarian debt denominated in Swiss Francs from a while back?
Well, a line from Citi’s reaction to the SNB ceiling removal explosion on Thursday catches the eye: Read more
A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.
Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:
Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.
I mean really…
This from JPM asks the right questions: Read more
From the SNB, click through for the full thing:
Timing is a bit odd no? Worried about all them roubles perhaps? Read more
Someone once wisely said, “if you love something, let it go. If it returns, it’s yours; if it doesn’t, it never was.”
But as Willem Buiter, chief economist at Citi, points out on Thursday, that’s not the message those with a tendency for passion investments seem to have ever received. They want to imprison the thing they love most and keep them in a dark dingy basement.
In a note on the non-virtues of gold and bitcoin investing (and the upcoming Swiss gold referendum), Buiter notes:
- Gold is a fiat commodity currency (with insignificant intrinsic value).
- Bitcoin is a fiat virtual peer-to-peer currency (without intrinsic value).
- Gold and Bitcoin are costly to produce and store.
- Gold as an asset is equivalent to shiny Bitcoin.
- Central bank fiat paper currency and fiat electronic currency are socially superior to gold and Bitcoin as currencies and assets. There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value.
- Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.
Tbh, we thought this one would just go away.
But no, on November 30 there’s to be a vote in Switzerland which, if won, would shackle the Swiss National Bank by forcing it, amongst other things, to hold at least 20 per cent of its assets in gold; to repatriate any gold stored abroad; and to refrain from selling any gold in future.
From SocGen’s Sebastian Galy:
According to Goldman, the answer is sooner than the market thinks. A new note argues that the Swiss franc is already overvalued against the euro, which should give the Swiss National Bank cover to raise rates in response to a vibrant domestic economy and an overheating housing market.
Thanks to a history of low inflation, institutional stability, and (until recently) a long tradition of banking secrecy, money tends to flow into Switzerland when people are worried, and it flows out when investors are looking to take more risk. Between the 2007 low and the peak in the summer of 2011, the trade-weighted franc appreciated by nearly a third as savers in the euro area worried about the collapse of the single currency. Read more
Beat Siegenthaler, FX strategist at UBS, has been wondering about what the Swiss National Bank may do if the ECB’s measures to weaken the euro begin to test its 1.20 EURCHF floor.
He notes, for example, that there has already been a marked divergence between the EURCHF and the USDCHF:
Not many people seem bothered by France’s overnight downgrade by Moody’s. The euro shrugged and French bond yields crept upwards at a snail’s pace.
But one place the downgrade might have a real and lasting impact is within the Swiss National Bank. They have a predilection for core eurozone bonds and the downgrade might just prompt them to ditch what holdings they have and/or stop loading up on French debt.
An interesting nugget from Nomura’s Geoffrey Kendrick on the Swiss National Bank data released earlier, as it pertains specifically to sterling:
On GBP specifically we estimate that SNB buying accounted for two-thirds of all non-resident buying of gilts in Q3.
So much for the one sided debate about the Swiss National Bank’s bond purchases. JP Morgan’s Flows and Liquidity team argued over the weekend that while it is true that FX reserves are absorbing a significant part of the supply of high-quality AAA/AA bonds , they are still taking up less than half of the issue. And significantly reserves managers are big participants in securities lending… which includes the SNB.
Ok, in combination with Alice Ross and James Mackintosh we did a very back of the envelope calculation comparing the S&P’s figure with that suggested by the SNB’s methodology (they did not give a figure). Read more
Image by Neal Fowler
That’s the Swiss franc floor abiding, unchanged at SFr1.20 despite the recent rumour mongering. Read more
There is plenty of chatter out there about the Swiss franc floor being raised (and just as it celebrates its first birthday party too).
Nobody we have talked to has any actual idea if Jordan et al at the Swiss National Bank will kick the floor up (with SFr1.22 the likely spot if they do) and most don’t see them actually doing it . Read more
It can’t be much fun being an Australian in London at the moment. (Trailing the Brits is one thing, but lagging the Kiwis in the medal table must really hurt.)
But at least our antipodean visitors can afford to indulge in a little retail therapy at Westfield Stratford City (the Australian dollar is trading close to a record high against the British pound) or, if they are really embarrassed, hop on the Eurostar to Paris (where the dollar hit a record high against the eurothingy just last week). Read more
Switzerland is the new China and it owns a cake, some of which it just doesn’t find all that appetising. (We admit this might be getting confusing but there is method to our madness.)
The Swiss National Bank has pledged to hold the euro-Swiss franc exchange rate at SFr1.20 no matter how many euros come flying its way (Chinese style currency manipulation.. or, at least, it was) while building up a stack of unwanted euro denominated assets which it has to try and shift via diversification (into a cake of many ingredients rather than a cake made entirely of icky euro). Read more
How many reserve assets does it take to screw a Swiss franc into a euro-sized peg?
Answer: this much (so far): Read more
First a chart courtesy of Kit Juckes over at SocGen: