17 September Statement:
The SNB will act decisively to prevent any appreciation of the Swiss franc against the Euro.
10 December Statement:
The SNB will act decisively to prevent any excessive appreciation of the Swiss franc against the Euro.
I love it when they do this. It ‘s all so subtle. The impact caused quite a jolt in FX markets. On a relative basis the CHF/EURO has moved quite a bit in a short period of time (2%). These are the ways of the Central banks. They change a word or two and create an immediate economic impact. Those impacts can be far reaching. It is the nature of things today. The Central Banks can move markets and change economic policy with the insertion of a single word. That is power. There are almost no checks and balances to this power.
You might say, “Who cares about a few ‘big figures’ in the Euro/CHF rate”. I can assure you that a number of folks made an absolute bundle out of this. On the other hand, there are thousands of credit card borrowers in Eastern Europe who are a 'little poorer' as a result.
I like to speculate on the ‘Whys’ of these important decisions. Unfortunately, CB’s do not give us a lot of insight into their thinking. I would offer up a few possible scenarios on how this came about. You decide which one is correct.
A) The SNB arrived at this policy decision without input or pressure from any exterior sources. It was simply time to reduce one of the ‘extraordinary measures’ undertaken during the ‘crisis’.
B) The SNB realized that the six month experiment with currency intervention was not achieving much for the domestic economy and they were taking increasing pressure from the other EU Central banks on their policy of “beggar my neighbor” through the cheap currency policy.
C) On or about December 10 the SNB saw the handwriting on the wall and moved to change policy. They saw the gathering forces of the Sovereign Risk issue (Greece) emerging and realized that Euro weakness was a likely short-term result. In that environment they knew that to continue to defend the 1.51 Euro/CHF parity in the FX markets was going to force them to substantially increase their market intervention. This would prove costly, both in terms of actual losses on their Euro holdings and at the significant cost of increasing the money supply. They chose to back off rather than fight.
In my opinion the decision had nothing to do with A. This change in policy was driven by a combination of B and C. On December 10 (two days before the SNB announced their move) I quoted a Greek citizen in the shipping business as saying this of the Swiss dirty float currency policy:
"If Greece had its own currency it could adjust it to achieve a trade advantage that would address the fundamental imbalances. If it works for the Swiss, then Greece should do it too!"
While I doubt the SNB was reading my blog, I am sure that they heard this sentiment from many other European financial officials. The change in currency policy was a result of external pressures. It had little to do with the domestic Swiss economy.
This is a small example of decision making at the Central Bank level. Nothing is as clear as it would seem to be. Everything is connected. Policy choices reflect a ‘gun to the head’ mentality versus a well thought out strategy. The Central banks are trying to manage the short-term. They may be able to influence the short-term, but they remain slaves to the long-term forces.
************
In 2010 the major CB’s will be coming forward with an endless stream of market moving information. Across the globe there are steps being made to reverse the ‘emergency measures’ that were undertaken in 2008.
Center stage on this is the Fed. Mr. Bernanke is piloting a tanker filled with $2 trillion of highly flammable liquid. He not only has to slow this ship down he has to put it in reverse. And he has said that he will do that in less than one year. A soft landing appears difficult to achieve.
The Fed’s most recent purchase of Agency bonds was a measly $9 billion. Down from $25 billion a few months ago. The QE program is ending. Slowly, but ending. It is no coincidence that the 10-year closed the year at a 3.85 yield and the price looking soft.
Mr. Bernanke and the NY Fed have been experimenting with a few techniques on how to unwind all this. Nothing like this has ever been tried before. They have indicated that they have it all figured out. I’m not so sanguine.
There is going to be a lot of loud and overt announcements from the Fed in 2010. Things like reverse repos and increases in deposit rates for free reserves. Each announcement will move markets. We’re also going to get a ton of the ‘subtle’ stuff. It’s the subtle stuff that worries me. That will move markets too. It should be a great year for the blogs. Happy New Year.
No comments:
Post a Comment