I reported on June 18th that the second quarter results for the SNB would show a loss of ~$8b as a result of its holdings of Euro’s. Subsequently the FT confirmed my estimate. And now, the leading business paper in Switzerland (and historically a mouthpiece for the SNB) has reconfirmed the magnitude of the second quarter loss.
There are some tealeaves to read here. The CHF is going to move based on market forces and developments outside of Switzerland. In the past few weeks the market for the EUR/CHF has stabilized. But there can be no assurance that this status quo will be sustained. Should conditions in the EU deteriorate from where they are today the CHF will again come under a speculative attack as money leaves the Euro for a safer place.
What is different today is that the SNB is frozen. They can’t intervene any longer. They may have been able to ignore a lowly blogger. They can pretend that the FT does not exist, but they can’t ignore the article today in the NZZ. As far as I am concerned the SNB is out of the market. They are now functionally unable to intervene. It would take a significant crisis and a major move in the EUR/CHF cross to get them back in. Based on these developments I would expect that a move to 1.25 in the cross will come. Should things once again turn negative for the Euro Zone this could happen very quickly.
The Swiss intervention was a colossal error. While the policy was in place it distorted the market. It had the impact of slowing the weakness of the Euro against all currencies. That is how the crosses work. The SNB action had the impact of stabilizing the entire FX market. At least it did for a few months. Now that the Central Bank has had its hands tied the market can run free. No more risk that the SNB is going to muck up a good position. Having won this battle the market will be even bolder the next time an opportunity to lean on the cross occurs. That is just a matter of time. FX volatility is about to increase.
Hildebrand is ex Moore Capital. Louis Bacon runs Moore. Bacon has a long and successful track record of positioning his firm correctly in the FX markets. In May of 2010 Bacon had this to say. Possibly Mr. Hildebrand should have listened to his former boss.
Focusing specifically on Europe, Bacon sees "long-term disastrous consequences for the (European) Union and Europe."
This is an interesting bit of history that is now unfolding. A central Banker is being held up to the world for the mistakes that have been made. Heads may roll. Could this be the beginning of a trend?
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This whole situation raises some disturbing questions about conflict of interest. Suppose, just suppose, that M Hildebrand entered his trade to take Moore out of a bad one--that would be wrong, as Richard Nixon once said.
ReplyDeleteThat being said, why do central banks worry about losing money on trades? They can always make more. . .
Bruce,
ReplyDeleteAs you know, the Fed just spent $1.25t -- money which it created out of thin air -- to buy MBS. Can you estimate the likely losses on that? Say the loss is only 1% (which is ludicrous -- it'll be much higher than that); then the Fed will have lost $12.5b, right?
Also, I assume Moore Capital is a for-profit business; is that correct? And their business is speculation, or so it would seem. Call it investment if you like. So another description of such an Äusserung could be that he was 'talking his book'. You might want to keep that in mind.