The Swiss National Bank's shock move today
to stop intervening in the foreign exchange market all but guarantees
the European Central Bank will finally introduce quantitative easing
when it meets Jan. 22. Switzerland is surrendering before a wave of
post-QE money fleeing the euro threatens to make a mockery of its
currency policy. It's also capitulating as slumping oil brings global
deflation ever closer. Europe's QE Quandary
It's an astonishing U-turn. Just two days ago SNB Vice President
Jean-Pierre Danthine told Swiss broadcaster RTS that “we’re convinced
that the cap on the franc must remain the pillar of our monetary
policy.” He added, though, that it was "very possible" that QE would
make defending the threshold more difficult. It seems highly probable
that the ECB has winked about its policy intentions to its Swiss counterparts.
The ensuing whipsaw in the currency market is unprecedented. The
franc immediately appreciated almost 30 percent against the currencies
of the Group of Ten industrialized nations, and surged to a record
against the euro:
The Swiss central bank has capped the franc's value since September
2011, intervening to sell its own currency whenever it threatened to
strengthen beyond 1.20 per euro. The policy was designed to protect the
economy from safe-haven seeking investors propelling the currency
higher, and trashing exports.
Many Swiss financiers were affronted by the peg in the first place.
The nation's private banking edifice was built on the principle of
respect for private property and free movement of capital; market
manipulation didn't sit well with that philosophy.
At a hastily arranged press conference, SNB President Thomas Jordan
declined to comment on whether he'd been in touch with other central
banks, saying that keeping the cap no longer made sense and that its end
had to be sprung on financial markets. Judging by the televised feed,
he isn't a particularly happy bunny today. The official explanation
posted on the central bank's website is that the Swiss economy "was
able to take advantage of this phase to adjust to the new situation,"
and that the dollar's surge has offset euro weakness. Swiss exporters
aren't convinced: Swatch Group AG Chief Executive Officer Nick Hayek
immediately called it a "tsunami for the export industry and for
tourism, and finally for the entire country." Exports of Rolexes and
other watches account for more than 10 percent of the country's exports.
There are a handful of other immediate losers from the move. Any
trader who was short the Swiss franc this morning is probably still in a
state of shock; Forex.com, a currency trading website, suspended
trading in the Swiss currency after the central bank announcement.
Staffers at the Swiss central bank's Singapore branch, which opened in
the middle of 2013 to replace the currency-defending night shift in
Zurich, will probably be relocating.
Less certain are the implications for lenders including OTP Bank,
Hungary's largest lender, Vienna-based Erste Group Bank, and Italy's
Unicredit, who lent about $14 billion to Hungarians in foreign-currency
mortgages prior to the financial crisis, the bulk of them denominated
in Swiss francs. A November law obliges banks to convert those loans into forints,
and the Hungarian central bank arranged a foreign-currency transfer at
that time to cover those conversion needs. The law obliges banks to
switch at about 257 forints per franc; today's whipsaw puts that
exchange rate at 310, meaning any bank that left itself exposed is
facing a huge loss.
In an accompanying move, the Swiss central bank will now charge banks
0.75 percent for the privilege of depositing money with it. In the bond
market, investors in Swiss government bonds are getting negative yields
on any securities with maturities of nine years or less; at one point
this morning, your reward for lending to Switzerland for a decade
dropped to 0.033 percent, or so close to zero that it really makes no
difference.
In the past five years, Swiss consumer prices have dropped by an
average of 0.1 percent; the most recent figures showed annual inflation
dropped by 0.3 percent in December. It's clear from the central bank's
comments that today's actions are intended to lessen the impact of a
global deflationary backdrop, since a stronger currency should,
according to economic theory, produce higher prices for the relevant
country.
For the rest of the world, today's move confirms that deflation is a
clear and present threat to the global economy. Central bankers
everywhere should be re-reading Ben Bernanke's November 2002 speech
"Deflation: Making Sure `It' Doesn't Happen Here" -- and reviewing their
policies to make sure they're doing everything they can to boost growth
and make consumers and companies more confident about their economic
futures.
To contact the author on this story:
Mark Gilbert
at magilbert@bloomberg.net
To contact the editor on this story:
Cameron Abadi
at cabadi2@bloomberg.net
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