The currency markets have reacted to all the good news. All the short EURUSD positions got blown up (again) The main bell weather for this is the EURCHF cross. It has backed up three big figures since the start of the year.
I write a fair bit about the CHF. I think it does play a pivotal role in the broader markets. But I rarely trade it. I have seen time and again that this pair (EURCHF) hurts players. The problem is that it is a sucker trade. It is too easy to get short at the wrong time and just as easy to get long and be wrong.
When the news flow turns blackest for the EU you sit back and think, “It’s gotta be right to be short!” But then the news flow turns (one bond auction? give me a break) and it’s all bid no offer.
This too will pass. Europe’s problems are not over. Not by a long shot. There is no “soft landing” scenario. The news will turn negative again in the not too distant future. A month or two at best. With the bearish view still intact one would have to conclude that the EURCHF will be a good short again at some point and new lows are in front of us. Should (when) this occur the Swiss will have a big policy problem on their hands. They survived quite well in 2010, even though the key Euro cross fell by 20%. It’s not possible that we could see an additional significant gain for the Franc in 11’ without it having a major deflationary impact.
With this kind of thinking in mind the influential Neu Zuricher Zeitung came out with a list of things that might be considered to slow down the inevitable rise of the Franc. I thought the list was interesting, so were the conclusions: (excuse my poor German translation)
(I) Peg to the euro
Conclusion: This is a no-go!By pegging the franc to the euro, it would force the SNB to be completely “addicted” to constant intervention. It would require huge amounts of money to be printed.
(II) Adopt the Euro as the national currency
In the face of undeniable economic differences (from the lower unemployment rate to lower level of debt) Switzerland would not fit in the euro area.
(III) Defending a price band
The determination of the SNB in defense of the band would be tested repeatedly until it gives up.
(IV) Negative interest rates
It was an act of desperation (when it was implemented in the past), and it would be again today. It would discourage foreign investors, of whom Switzerland is dependent on the long term.
(V) Introduction of the gold standard
There is not enough gold in the world to keep pace with world economic growth. A renewed commitment of the currencies of gold would therefore lead to deflation. We no longer live in the twenties or thirties of the last century.
(VI) Taxes and compulsory deposits
Switzerland lives off the money is invested with us. Switzerland would be catapulted from the circle of reliable financial centers. Even a small tax would be a disastrous signal.
(VII) Regulate foreign exchange market
The attempt to develop with a restrictions of trading positions would be doomed to failure.
(VIII) Pray
There is no VIII. There are no other options available for consideration. The seven discussed above clearly don’t work.
It’s awful hard to get long EURCHF looking at the list.
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I was surprised to hear THIS statement...
ReplyDelete"There is not enough gold in the world to keep pace with world economic growth. A renewed commitment of the currencies of gold would therefore lead to deflation."
This is a spurious argument.
Quite apart from the question of whether what we have been witnessing in recent years really IS "economic growth" measured in terms of increased production (NOT in currencies!), why does economic growth require a constantly increasing money supply?
Even in a situation of real economic growth, why must nominal prices always be rising? And in a situation of a HEALTHY, natural deflation - one brought about by economies of scale and more efficient production, as in microprocessors, etc. - prices are SUPPOSED to fall.
And in the case of a generally increasing level of social productivity, for each widget produced the quantity of gold received for it would perhaps shrink. But there is no reason why the purchasing power of that gold wouldn't be maintained, or more likely even increased...
Unlike paper currencies, the quantity of gold available increases by only around 1% per year; because of this gold is infinitely divisable without losing much, if any, purchasing power.
Kreditanstalt,
ReplyDeleteMany at other web sites who read this came to the same observation as you. Who knows how this will turn out. But a reversion to a gold standard is many years off, if ever. Without inflation the west would get sucked down by social costs that are fixed for the next 25 years.
Grow or die are the only options. Your gold standard runs counter to the growth story. It is why the Swiss and most other countries would not touch it as a policy option.
My cousin has suggested a measure to stop the raise of the CHF:
ReplyDeleteHe said we the Swiss should stop paying all taxes and our government should start to spend on silly projects so long until we have created an equally large dept similar to other EU states.
This action should work to weaken the CHF it might take a while to rack up enough dept short of giving away 18 billion CHF to the IMF which we certainly will never see again.