Sometimes events really do overtake us and an example of that has just taken place. So let me give you an update on two of the major themes of this blog which are the currency wars which are taking place and the move towards negative interest-rates. There has been something of a game-changer this morning from the Swiss National Bank.
The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.
Regular readers will have been aware of what has been taking place here but for newer readers and as something of a refresher for all let me take you back to September 2011.
Step Back In Time
If we take the advice of Kylie Minogue and go back to the 6th of September 2011 we see quite a different statement from the Swiss National Bank.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF
exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
If we examine the language we see that it was to say the least rather extreme with “no longer tolerate” and “utmost determination” used in an early example of what we now call open mouth operations. Also we got a rationale for the behaviour and language.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.
The Chairman of the SNB Phillipe Hildebrand backed it up with some more rhetoric in his press conference that day.
The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc.
Did he get it?
The short answer is no as the furthest the currency moved was just shy of 1.25 versus the Euro in May of 2013. At that point there was some further bombast and hype about the cap being moved to 1.25 or even 1.30. That all seems rather hollow now doesn’t it?
What about further measures?
The main mover on this front we saw on the 18th of December last year.
The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative
Negative interest will be charged as of 22 January 2015 until further notice.
Negative interest is charged only on the portion of the sight deposit account balance which exceeds a certain threshold.
The exemption threshold applies to each individual account holder and shall be at least CHF 10 million.
As you can see this move was on two fronts. Firstly it meant that Switzerland joined the increasing number of countries with negative interest rates. And secondly there was a clear hint to the European Central Bank (ECB) that it needed to act as well as it was not by chance that the date of its next policy meeting was chosen (January 22nd).
Back on the 18th of December I explained what I believed were the causes of this.
The statement was a little vague as to the cause but the press conference then told us what I am sure that many of you were expecting to read and the emphasis is mine.
Over the past few days, a number of factors have prompted increased demand for safe investments. Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.
The number of factor seemed to have shrunk to just one! I had already been using Twitter to disseminate this message.
The Swiss National Bank had found itself having to intervene more and more to cap its currency against the Euro. Now it found itself between the rock of its macho rhetoric and the hard place of having to back it up in large amounts. I have pointed out before that by fixing the price this became a quantity game and that this is dangerous because some big players like that as they sniff large profits. This happened to the UK in its exit from the ERM in 1992 as George Soros sniffed blood in the water in the same way as a shark does.
What happened in the last 24 hours?
Last night I tweeted this.
What was troubling me was the fact that the SNB had advertised that it would start to cap the Swiss Franc at 1.2008 so we found ourselves only 0.0001 away from it when it was an apparent “free lunch” for punters. It just did not look right as I mulled how much buying of Euros and selling of Swiss Francs the SNB might be doing. Now we know that even “utmost determination” was not enough and that “unlimited quantities” was the lie I always expected it to be.
Boom and Bedlam!
As you can imagine the market response has been chaotic and immediate. As I type this The Swiss Franc has blasted some 13% higher against the Euro to the 1.04 level. It did go through the parity level at one point with arguments to come as to exactly how far!The Swiss SMI equity index is down 8.7% as Swiss businesses mull the consequences of a higher exchange rate going forwards. I wonder if Switzerland will be the first country to have a negative ten -year bond yield?
There is much to assess here but let me give you my initial thoughts. On a worldwide scale this is a collapse of one of the pegs of the system and is a kick in the teeth for those who treat central bankers as omniscient and all-powerful. I put in thus on the 18th of December.
As King Theoden says in the Lord of the Rings
And so it begins….
Other moves by central banks are now threatened by this as the world monetary system receives quite a shake. What broke this dam? It seems fairly clear that the Russian crisis and the consequent flood of Roubles out of Russia into what are perceived as safe havens was the straw which broke the camels back.
For the Euro area and the European Central Bank we have plenty of consequences to consider as that project has clearly had considerable adverse effects for Switzerland. I have summed it up on twitter thus.
Dear European Central Bank what have you got now? Signed the Swiss National Bank
For those with foreign currency mortgages denominated in Swiss Francs in Eastern Europe then this is something of a shocker. Whilst they may see interest-rate cuts many of these adjust for the capital debt which has just shot higher. So monthly payments may shoot up again. Hungary has made moves to meliorate this but that may just simply shift the pain to (Austrian and Italian) banks and the state.
For Switzerland there is the likelihood of a much higher exchange rate and therefore another disinflationary push. This comes in a country where prices were already falling. Exporting looks likely to be more difficult especially for products which are price competitive. However those with Swiss Francs are suddenly a fair bit wealthier in terms of the ability to purchase foreign goods and services. As to the Swiss National Bank then it looks like it has just lost the Swiss taxpayer a fortune. Still they were asked in a referendum right? Oh hang on………
If you are going skiing in Switzerland this year then I hope that you have already changed up your money into Swiss Francs.
Update 1pm UK Time
We have now had a press conference given by the current Chairman of the SNB Thomas Jordan. He has not added much to what we already knew except for his denial that negative interest-rates will spread to ordinary banking customers. On his track record that means that they are very likely too! Also there is this.
As to events themselves then let me pass you over to Kate Bush.
Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!
Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!
When the actor reaches his death,
You know it’s not for real. He just holds his breath.
But he always dives too soon, too fast to save himself.