So the SNB decides to peg the Franc to the Euro. Interesting move, in contrast to recent currency intervention attempts a la BOJ spending a specified amount, the SNB is setting a specified target and implying that they’re ready to spend whatever it takes. So the question is, “are they?”
I have to go off on a tangent real quick and give shout outs to two people. One, ChessNWine because his TA predicted this news event. You know you’re the man when your TA predicts news events. Two, Cain Thaler for his write-up a bit ago proposing that the Fed do almost exactly what the SNB is doing. But I digress, so let me backtrack a tad.
While the SNB is attempting to peg the Franc to the Euro, the free markets may raise their middle finger and disrupt the Swiss plans. In Layman’s, the SNB is going to have to spend an unspecified, perhaps unlimited, amount to keep this peg, dependent upon how much the free market really believes the SNB is devoted to the peg. The Franc very recently has seen unprecedented levels of interest in its debt, causing its currency to rise dramatically, hurting exports and deterring growth. That’s obvious, it’s basic economics. So who also benefits from a cheaper Franc? Probably some bullshit, miniature euro countries that use the Franc as a currency in business deals, but who really gives a fuck about that. I’m much more focused on the help this may provide to the Euro. Should the SNB surprise the market in its devotion to the peg, we could see some relief in the Euro zone. Indeed, immediately after the news, the euro markets rallied hard, some going green and the Swiss market shooting +4%. Welcome to the inflation game, Switzerland. However, let me connect this story to one of my shoutout’s, my man Cain Thaler.
Seriously, he is a must read. Just a week or so ago, in an article about what QE3 may look like, he put forth the idea of QE3 being the Fed’s support of the Euro. For reasons discussed within the article and added after its posting, he (and I hahaha) defended the thesis with logic and reason. But really, what is the difference between the SNB and the Fed boosting the Euro? Both are triple AAA countries (LOL @ SP), whose debt is at interest rates lower than ever before and who are inextricably tied to the success of the EU. Further, very recently some rumors of a $420Bn package coming soon have circled the wires. Let me propose a theoretical situation: should Double B ride shotgun with the SNB, the determination of central bankers may overwhelm the free markets and we could see a ton of relief in the Euro zone’s stricken nations. Moreover, the USD would catch another right hook from Boxer Ben and the reflation trade may be back on the table as quickly as it was wiped off and replaced with doomsday scenarios.
The ease with which the plate on the table is replaced shows just how up in the air our current economic landscape is. Failure is just as likely as success, reasonably speaking, and it all depends on how motivated and accepted the central bankers are. What a fucked up world we live in.
Good luck out there
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Certainly the SNB can attempt to aid in the easing of the euro. But two points, both which stem from the fact that Switzerland is small:
The first is that there’s a good chance the Swiss themselves will target only higher quality paper such as Germany and France. What they are doing is already dangerous enough without dicking around with speculative paper. In order to fight the world, they may have to fluctuate the number of Swiss Francs in circulation by extreme amounts. 2, 3, even 4 times their outstanding currency. No sense buying shit that defaults in the process and screwing themselves 6 ways sideways.
The second is that Switzerland is a drop of water in an Ocean of piss. While they help theoretically, in the real world they help “not really.” If Italy or Spain are going to get a reprieve, it has to come from someone bigger. Either it’s us (U.S.), the EU, or a massive creditor like China. Switzerland just isn’t up to the task.
That being said, if this is the first sign that central banks are organizing themselves and getting their ducks in a row, then yeah I completely agree with you.