Friday, 16 January 2015

Swiss break Franc peg to Euro

Until yesterday the Swiss Franc (CHF) was pegged to the Euro - every time it soared above €0.83 the Swiss National Bank (SNB) printed up some CHFs and sold them to bring the CHF back to the desired level. And the CHF has been very prone to rising as the worried rich looked for a safe place to stash their cash.

Until yesterday SNB chairman, Thomas Jordan, was assuring the world that the Euro peg was here to stay, a permanent feature of Swiss monetary policy. Needless to say there was a good living to be made by foreign exchange (FX) dealers seeing a gap open up between the Euro and the CHF and, knowing that the SNB would soon act to close it, placing an appropriate short-term bet. Yesterday they all got their fingers burned and billions must have been lost.

So why did the SNB drop the peg? Well, they almost certainly know something we do not, and most likely that thing is that the EU is about to start quantitative easing (QE), ie printing up some Euros, and this would make it impossible to maintain the peg. Previously the SNB has maintained they would keep the peg during Euro QE, but likely they have been told just how many Euros are to be printed and it's a very big number indeed and keeping the CHF down at the level the Euro is going to fall to would be too damaging to the Swiss economy to tolerate.

The SNB is already suffering from the CHF printing it has had to do to keep the Franc down at Euro levels - it has created "substantial" inflation in Switzerland. ("Substantial" for a Swiss person is different from what anyone else might consider high inflation. The CHF has maintained its buying power for decade after decade - 0.1% is high inflation for the Swiss.) One must assume the SNB took one look at the EU's intentions and realised the game was up - they had to break the peg. So they bit the bullet early, announced the peg was over, and the CHF soared.

Here's a graph of how many CHFs one pound will buy you:



Much the same graph applies to all other currencies vs the CHF - they all fell off a cliff; generally about 30% down.

What are we to take from this? Well, in fact, the really signicant factoid is the "confirmation" of Euro QE comming soon, perhaps as soon as next week. If it's as big as the SNB seem to be indicating then there is going to be a lot of "free" money sloshing around. This will find its way into the world's stockmarkets and make them fly.

But money printing is likely to be unpopular in Germany. They still have a race memory of the Reichmark and how a loaf of bread went from 1 mark to 1 million in less than a year. The Germans wrote the rules for the Euro and they made it illegal to make new ones from nothing. Euro QE could well be challenged in the courts. That though, will take time and QE will be a done deal before any verdict is returned.

Another coming event is the Greek general election next week (on Sunday). If a party determined to leave the Euro wins the Germans will need the big Euro print-run to bribe them to stay and to deal with the systemic shocks if they do leave, ie, to lend to banks which have run out of money due to the Greeks defaulting on their debt.

Another shock coming down the pipeline is mortgage defaulting in Eastern Europe and Russia. A lot of people in the East have CHF-denominated mortgages because the interest rate is so much lower: the Euro base rate is 0.15%, but in Switzerland it's a negative number - they pay you to borrow money from them! (Intriguingly but perhaps not related: the same is true for gold at the moment. The "GOFO" rate is negative.)

These CHF mortgage holders have just seen a 30% rise in their their payments and some of them are not going to be able to make it. This is particularly true in Russia where the Ruble lost half its value in the course of 2014 (mainly due to political pressure on Putin to get him out of the Ukraine.) Russian CHF mortgage holders who can survive the multiple shock of a collapsing economy, a collapsing currency and a soaring CHF are likely to be very rare indeed.

Unfortunately if someone owes you money and they cannot pay, it's really you who has got the problem. We are entering a period of deep uncertainly in the markets (although I'm confident the CHF will remain a good place to store your savings!)

3 comments:

Anonymous said...

Tell us that "Nationalist" had plenty of Swiss Francs before this happened :-)

Nationalist said...

This blog has been bigging up the CHF for many years and was very disappointed when they pegged to the Euro back in 2011.

Of course "Nationalist" keeps savings in CHF and made a mini killing on the day.

chefdave said...

Well called Nationalist, I tip my hat to you Sir!