Thursday, January 15, 2015

The Swiss Let the Franc Rise

The Swiss Let the Franc Rise

The Swiss National Bank abandoned its defense of the value of the Swiss Franc versus the Euro.  For the last couple of years, the Swiss were prepared to buy as many Euros as necessary to keep the Swiss Franc from appreciating above 0.8 Francs to the Euro (or below 1.2 Euros to the Franc).  At the same time, the Bank raised the interest rate it charges for making deposit to LIBOR to -0.25% to -1.25%. from -0.25% to -0.75%.  What’s going on here?

Switzerland and its currency have been a haven for all sorts of investors, speculators, and oligarchs to park money as Russia wobbles, Greece stumbles, oil prices plunge, and uncertainty reigns.  In order to protect the Swiss economy from losing competitiveness because of the rising Franc, the bank had been willing to buy lots of Euros, which have been piling up on the bank’s balance sheet.  By keeping the Franc from rising, the bank had hoped to keep Swiss exporters competitive in world markets.  They can’t afford to keep this up.

Charging depositors to leave their money in Swiss bank accounts represents the second half of the bank’s experiment.  To be clear, you don’t earn interest on savings in a Swiss bank account.  Rather you pay for the privilege of having your money on deposit.  The cost of depositing money just went up in order to discourage those seeking to protect their capital in Swiss accounts.

These moves are a big deal.  The Swiss Franc rose 20% in the hours following the announcement.  The US Dollar and other currencies suffered large losses relative to the Franc.  In recent hours the Franc has fallen a tad, but is still about 14% higher than it was 24-hours ago.  Swiss stocks have fallen about 8%, while the rest of Europe rallies (in theory, the cheap Euro should help exporters and European economies).

The size of the swings in the currency and financial markets suggests that the vast majority of the incredibly smart and well-paid strategists, economists, and portfolio managers didn’t see this coming.  In fact, Bloomberg reports, “Not one of 22 economists surveyed by Bloomberg News between Jan. 9 and Jan. 14 expected the SNB to get rid of its cap in 2015. Only four saw it abandoning the measures next year.”  Oddly, investors and the media are asking the same so-called experts to predict what will happen next.

I certainly don’t know.  However, when oil drops from over $100/barrel to under $50/ barrel; when a huge economy like Europe faces deflation; when Russia’s economy starts to unwind; and terrorism and political tension are on the rise, markets tend to gyrate.  The Swiss National Bank has reminded us that we’re facing some extraordinary problems that are in the process of testing our politicians, financial institutions, and nerves.


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