Saturday, 17 January 2015

The actions of the Swiss National Bank

What In The World Just Happened In Switzerland?
Michael Snyder



January, 2015

Central banks lie.  That is what they do.  Not too long ago, the Swiss National Bank promised that it would defend the euro/Swiss franc currency peg with the “utmost determination”.  But on Thursday, the central bank shocked the financial world by abruptly abandoning it.  More than three years ago, the Swiss National Bank announced that it would not allow the Swiss franc to fall below 1.20 to the euro, and it has spent a mountain of money defending that peg.  But now that it looks like the EU is going to launch a very robust quantitative easing program, the Swiss National Bank has thrown in the towel.  It was simply going to cost way too much to continue to defend the currency floor.  So now there is panic all over Europe.  On Thursday, the Swiss franc rose a staggering 30 percent against the euro, and the Swiss stock market plunged by 10 percent.  And all over the world, investors, hedge funds and central banks either lost or made gigantic piles of money as currency rates shifted at an unprecedented rate.  It is going to take months to really measure the damage that has been done.  Meanwhile, the euro is in greater danger than ever.  The euro has been declining for months, and now the number one buyer of euros (the Swiss National Bank) has been removed from the equation.  As things in Europe continue to get even worse, expect the euro to go to all-time record lows.  In addition, it is important to remember that the Asian financial crisis of the late 1990s began when Thailand abandoned its currency peg.  

With this move by Switzerland set off a European financial crisis?


Of course this is hardly the first time that we have seen central banks lie.  In the United States, the Federal Reserve does it all the time.  The funny thing is that most people still seem to trust what central banks have to say.  But at some point they are going to start to lose all credщbility.


Financial markets like predictability.  And gigantic amounts of money had been invested based on the repeated promises of the Swiss National Bank to use “unlimited amounts” of money to defend the currency floor.  Needless to say, there are a lot of people in the financial world that feel totally betrayed by the Swiss National Bank today.  The following comes from an analysis of the situation by Bruce Krasting

Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.


The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.


The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP!


Most experts are calling this an extremely bad move by the Swiss National Bank.
But in the end, they may have had little choice.


The euro is falling apart, and the Swiss did not want to be married to it any longer.  Unfortunately, when any marriage ends the pain can be enormous.  The following comes from CNBC


How do you know you’re looking at a bad marriage?


Well if one or both of the spouses can’t wait to get out as soon as the smallest crack in the door opens, you have a pretty good clue.

Something like that just happened in Europe as we learned the real reason why so many traders were still invested in the euro: They had nowhere else to go.
As the Swiss National Bank unlocked the doors on its cap on trading euros for Swiss francs, the rush to exit the euro was faster than one of those French bullet trains.


But this move has not been bad for everyone.  In fact, for many of those that live in Switzerland but work in neighboring countries what happened on Thursday was very fortuitous


I heard the news this morning. I’m so happy!” Vanessa, who refused to give her last name, told AFP outside of one of many mobbed exchange offices in Geneva.
She has reason to be extatic: she is one of some 280,000 people working in Switzerland but living and paying bills in eurozone countries France, Germany or Italy.


These so-called “frontaliers”, or border-crossers, are the biggest winners in Thursday’s Swiss franc surge, seeing their incomes jump 30 percent in the blink of an eye.


In normal times, things like this very rarely happen.

But in times of crisis, things can change very rapidly.  We are moving into a time of great volatility in global financial markets, and great volatility is often a sign that a great crash is coming.


This move by the Swiss National Bank is just the beginning.  Expect more desperate moves on the global economic chessboard in the days ahead.  But in the end, none of those moves is going to prevent what is coming.


And one of these days, another extremely important currency peg is going to end.  Right now, the Chinese have tied their currency very tightly to the U.S. dollar.  This has helped to artificially inflate the value of the dollar.  Unfortunately, as Robert Wenzel has noted, someday the Chinese could suddenly pull the rug out from under our currency, and that would be really bad news for us…

In other words, the SNB is no People’s Bank of China type patsy, where the PBOC has taken on massive amounts of dollar reserves to prop up the dollar.
Will the PBOC learn anything from SNB? If so, this will not be good for the US dollar.

So keep a close eye on what happens in Europe next.


It is going to be a preview of what is eventually coming to America.


How come Radio NZ is reporting this? They don’t usually bother with anything that matters – such as oil prices


Swiss bank move prompts 'shockwave'

January, 2015

A currency trader is predicting losses of millions of dollars around the world after a shock decision by Switzerland's central bank to end its three-year policy of capping the Swiss franc against the euro.

Rankin Treasury chairman Derek Rankin said the Swiss sold hundreds of millions of francs and brought euros to stop the franc from strengthening against the euro.

sharemarket boardPhoto: AFP
But he said last night's decision sent the Swiss franc as much as 41 per cent higher against the euro and it had sent shockwaves around the world.

Mr Rankin said there would be global fallout and New Zealand companies would not be immune.

He said Swiss businesses said the move was a massive knock to the country's exporters.



What Really Happened At 

The SNB Yesterday: One 

Person's Take


16 January, 2015


Via Reto Rietberg,


Here are a few theories on what really happened at the Swiss National Bank on January 15, 2015. That fateful day, the SNB suddenly decided to end suppressing the value of the Swiss Franc versus the Euro.

What happened at the SNB?

At the hastily arranged press conference on January 15, SNB's president, Jordan, looked like a red-faced school boy caught with the hand in the cookie jar. None of his explanations made any sense. The SNB was clearly caught by surprise itself and didn't have time to make up some better lies. But why this sudden change of heart, throwing in the towel causing book losses of somewhere around CHF 75bn (>10% GDP)?


Some theories:







a) SNB had to buy Euros by the billions every day, and the balance sheet was exploding. FX holdings, at almost 500bn at the end of 2014 might have reached 600bn or more (almost 100% of GDP). SNB is a listed bank with minority shareholders (like the German Theo Siegert, who holds 5.5%). So may be Swiss regulator was getting uneasy with leverage?
b) Foreign FX is not held at the SNB, but rather at an account at a foreign bank in name of the SNB. May be at the ECB itself. So the ECB probably knew exactly what was going on, and how many Euros the SNB was piling up. If the number was getting out of hand, ECB could have threatened to leak some info, inviting speculators to mount an attack on the SNB.
c) SNB had to hold the fort until after the gold referendum, since such a disaster would have undermined trust in the SNB and possibly have tilted a few towards voting "yes". 
d) After the opinion of the ECJ on bond buying it has become pretty clear the ECB will go all-in at its next meeting and begin buying Euro-zone bonds in earnest. The SNB was running already into difficulties finding AAA Euro-zone bonds to buy with a positive yield (to "recycle" all the Euros bought). The SNB was forced further and further out on the maturity ladder, increasing DV01 (the risk should interest rates start rising).
e) ECB made an offer to the SNB to take those Euro-zone bonds off the SNB's balance sheet. In exchange, the SNB had to promise to stop buying Euros, effectively ending the peg. The ECB was never very fond of the SNB's interventions, since the large buying of Euros probably left the Euro stronger than it otherwise could have been, thereby working against the ECB's intentions. Letting the SNB know what is about to happen next week (and that the SNB would have been overwhelmed by Euro printing) left little choice. For the ECB killed two birds with one stone: it removed a large buyer of Euros, and it would give the ECB a large chunk of bonds they otherwise would have had to buy via the market.
f) The ECB told the SNB it couldn't care less about a "Grexit" (exit of Greece from the Euro-zone). The SNB would have to expect massive further inflows into the CHF in such a case.
g) Interestingly, an article appeared in the NZZ newspaper a few days before the cap fell ("Euro Mindestkurs - SNB-Doyen will neue Untergrenze", NZZ am Sonntag, January 11, 2015. In the article, Ernst Baltensperger, an "influential thinker in monetary policy", recommended giving up the 1.20 barrier as potential losses from the SNB's balance sheet were rising. He also floated the idea of replacing the Euro barrier with a cap versus a basket of currencies (50% Euro, 50% US Dollar).

The question remains how much of the SNB's equity is gone, and if it will be forced to resort to a rights issue. Instead of alienating Swiss Cantons with a cash call, the government might decide it is cheaper to buy out minorities, delist the stock and survive with an irrevocable government guarantee.

*  *  *

Of course, these are fictional narratives... but isn't the entire edifice of the world's markets 'fictional' where truth is stranger than any fiction one could have imagined just 7 short years ago...


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