Jan 15, 2015 9:06 AM EST
By Mark Gilbert
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The Swiss National Bank's shock move
today to stop
intervening in the foreign exchange market all but guarantees the European
Central Bank will finally introduce quantitative easing when it meets Jan. 22.
Switzerland is surrendering before a wave of post-QE money fleeing the euro
threatens to make a mockery of its currency policy. It's also capitulating as
slumping oil brings global deflation ever closer.
It's an astonishing U-turn. Just two days ago SNB Vice
President Jean-Pierre Danthine told Swiss broadcaster RTS that “we’re convinced
that the cap on the franc must remain the pillar of our monetary policy.” He
added, though, that it was "very possible" that QE would make
defending the threshold more difficult. It seems highly probable that the ECB
has winked
about its policy intentions to its Swiss counterparts.
The ensuing whipsaw in the currency market is
unprecedented. The franc immediately appreciated almost 30 percent against the
currencies of the Group of Ten industrialized nations, and surged to a record
against the euro:
The Swiss central bank has capped the franc's value
since September 2011, intervening to sell its own currency whenever it
threatened to strengthen beyond 1.20 per euro. The policy was designed to
protect the economy from safe-haven seeking investors propelling the currency
higher, and trashing exports.
Many Swiss financiers were affronted by the peg in the
first place. The nation's private banking edifice was built on the principle of
respect for private property and free movement of capital; market manipulation
didn't sit well with that philosophy.
At a hastily arranged press conference, SNB President
Thomas Jordan declined to comment on whether he'd been in touch with other
central banks, saying that keeping the cap no longer made sense and that its
end had to be sprung on financial markets. Judging by the televised feed, he
isn't a particularly happy bunny today.
The
official explanation posted
on the central bank's website is that the Swiss economy "was able to take
advantage of this phase to adjust to the new situation," and that the
dollar's surge has offset euro weakness. Swiss exporters aren't convinced:
Swatch Group AG Chief Executive Officer Nick Hayek immediately called it a "tsunami
for the export industry and for tourism, and finally for the entire
country." Exports of Rolexes and other watches account for more than 10
percent of the country's exports.
There are a handful of other immediate losers from the
move. Any trader who was short the Swiss franc this morning is probably still
in a state of shock; Forex.com, a currency trading website, suspended trading
in the Swiss currency after the central bank announcement. Staffers at the
Swiss central bank's Singapore branch, which opened in the middle of 2013 to
replace the currency-defending night shift in Zurich, will probably be
relocating.
Less certain are the implications for lenders
including OTP Bank, Hungary's largest lender, Vienna-based Erste Group Bank,
and Italy's Unicredit, who lent about $14 billion to Hungarians in
foreign-currency mortgages prior to the financial crisis, the bulk
of them denominated in Swiss francs. A November law obliges banks to convert
those loans into forints, and the Hungarian central bank arranged a
foreign-currency transfer at that time to cover those conversion needs. The law
obliges banks to switch at about 257 forints per franc; today's whipsaw puts
that exchange rate at 310, meaning any bank that left itself exposed is facing
a huge loss.
In an accompanying move, the Swiss central bank will
now charge banks 0.75 percent for the privilege of depositing money with it. In
the bond market, investors in Swiss government bonds are getting negative
yields on any securities with maturities of nine years or less; at one point
this morning, your reward for lending to Switzerland for a decade dropped to
0.033 percent, or so close to zero that it really makes no
difference.
In the past five years, Swiss consumer prices have
dropped by an average of 0.1 percent; the most recent figures showed annual
inflation dropped by 0.3 percent in December. It's clear from the central
bank's comments that today's actions are intended to lessen the impact of a
global deflationary backdrop, since a stronger currency should, according to
economic theory, produce higher prices for the relevant country.
For the rest of the world, today's move confirms that
deflation is a clear and present threat to the global economy. Central bankers
everywhere should be re-reading Ben Bernanke's November 2002 speech
"Deflation: Making Sure `It' Doesn't Happen Here" -- and reviewing
their policies to make sure they're doing everything they can to boost growth
and make consumers and companies more confident about their economic futures.
- R.V. /
GCR January
15, 2015 at 10:13am
For those of you who do not
understand all this banking mambo jumbo what this means is last night the
country of Switzerland decided to go gold backed currency many of the world
banks get there clue of how to bank model after their banks in order to have to
stay positioned within the markets behind the Swiss. It has been long standing
that Switzerland as always tried keep the lead this move to a gold backed asset
back on means that they are in a bit themselves from the market which will
cause a domino effect on other countries to follow the same which will include
currency re valuation and exchange welcome kids to the new time line that you
helped manifest your belief that 100 percent of prophecy by God comes true
enjoy the next chapter of your lives and everyone said timber
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