Forex Blog - SNB Deval A Bank Rescue Plan, Not About CHF Overvaluation
SNB Deval A Bank Rescue
Plan, Not About CHF Overvaluation
Generally speaking I give a
central banker the benefit of the doubt. But todayâ€™s SNB pork pie is so
over the top that I can only say who do they think they are kidding?
When global trade is
collapsing, benefits to competitiveness from a decline in a currency are
relatively muteâ€¦they need to be huge on a nominal basis to do anything to help
exporters outside of translation effects. And with G20 agreement this
weekend on one principle assured â€“ oppose protectionism and beggar thy neighbor
currency policy â€“ seeing unilateral intervention from the SNB today (okay
telegraphed in talking points by the central bank for better part of the last 6
months) being billed as an integral part of QE and stimulating economic
activity is laughable.
Moreover, I think it is a
very safe assumption that heavy buying (several yards) of euros and US dollars
for Swiss francs today was previewed and approved by US and European officials,
and especially so in the current environment. Remember FX is best left to
markets to determine is the cornerstone of central bank think on currency
policy full stop. So why would the likes of the ECB and US Treasury sign
off on unilateral Swiss intervention if not for pumping up the money supply now
that Swiss rates are at zero bound?
To save the banking system
of Europeâ€¦well to add to the bailing system on the flooded
European banking system. Eastern and Central European banks were large
lenders of CHF, at a lower interest rate, in local mortgage markets and some
business loans. They are getting crushed in the typical BOP crisis
(capital account) by having to service debt in CHF with crumbling local
currencies and a boycott of foreign capital in light of the global recession
and banking crisis. And we all know that Western European banks have
large stakes in many of these East
Europe institutions that
took to lending in CHF (carry trade as a way of life). Weakening the CHF
allows the flooded European banking system to plug pump out water from another
hole in the hull without sinking.
However, it remains to be
seen if the SNB approach (with surely G7 backing) has pulled the lid off of
Pandoraâ€™s box and will bring more into the devaluation game â€“ Japan comes to mind in G7. If it is good for the
goose should be good for the gander. However, Japanâ€™s monetary authorities seem to have made a
science of very indiscreet currency manipulation in a donâ€™t ask donâ€™t tell
agreement with G7 and may not need to follow the Swiss example.
But it is also a world of
never say neverâ€¦a large government encouraged US dollar decline could do lots
for US firms with overseas sales and if large enough, but so large that the
Wylie Coyote outcome is assured, could do at least as much for US growth as tax
cuts. Arguably an orderly dollar deval would be one tough task to carry
out and would demand a high degree of market confidence in the competence of US
officials and we know that well is tainted if not poisoned in the last 18 months.
Todayâ€™s SNB action tells me
more about the fragility of the European banking system than any press
conference by JC Trichet or quarterly bank statement from a major European
Roughly top to bottom in
EURCHF since 2007 high to 2009 low is about 13%...big but not unprecedented for
a major currency (EURUSD did more than that in July-Nov 2008) and what will
5-8% reversal achieve? Good news is there is no inflation so some of the
negative externalities of a deval are mitigated.
It seems to me the rise in
the CHF is all about a bank funding problem â€“ like all those carry trades
funded in CHF or Hungarian mortgages funded in CHF are forcing a massive short
covering in the currency, just as we saw with the USD and JPY. Addressing
imbalances via currency policy is never a good sign, not even in the current
environment of benign inflation.
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