[Calxy]

EURCHF Chart


A few facts:
o On 12th March this year the SNB announced both QE (Quantitative easing) and FX intervention. This was just days after the low was put in for equity markets. In fact the SMI (Swiss index) had put in the low just 3 days earlier after a 56% peak to trough fall.(It has since rallied 53%.). Just ahead of this announcement EURCHF was trading just below 1.4900. EURCHF immediately spiked to 1.5300 and since then & months later only managed to exceed that peak by about 150 pips (1.5448peak set on 16th March). Since then the peaks have been getting decidedly lower while the troughs have been getting marginally higher (intervention support has been the only thing holding up something that obviously wants to go down).

History shows us that the market eventually goes to where the market wants to go and the more you interfere the more impulsive the move is likely to be when it comes)

o People are comfortable with the fact that they can hold it if they want to and that is a valid point. Intervention is not linear. If you are intervening to stop your currency strengthening then your only concern is whether you run out of paper and ink (Printing money). However if you are intervening to stop your currency weakening you can run out of FX reserves (ERM/Asian crises etc) and have to step away. So theoretically that is correct to believe that you could actually intervene “ad infinitum” to stop your currency strengthening. However as we have seen there can come a time when that policy is no longer considered an appropriate one- Japan being a classic example where we are seeing a new administration adopt a different view to intervention.

o So back to Switzerland. In March this policy seemed wholly appropriate as fears from deflation to financial implosion to economic implosion justified this action. Amazingly nobody even criticized the SNB for its intervention policy (Or even the bank of England/Treasury for its obvious benign neglect for sterling as it too went to QE and an almost zero interest policy.)

o There have been a lot of issues in the past 2 years but one of them certainly has been the wash of liquidity that was allowing the CHF, JPY and USD to be used as funding currencies fuelling asset bubbles and the eventual financial contraction in 2008.

o Japan has indicated a changed policy on intervention but let us not forget that we saw pretty much 6 ½ years of JPY weakness wiped out in just over 6 months which took a lot of the leverage out of the JPY trade. Rhetoric is growing by the day about the weak USD-particularly relating to the imbalances in certain countries (In particular those who peg their currencies/maintain baskets.)

o How long before Switzerland could come in for some criticism in this respect. Outside of this is the more important question – Is this policy appropriate anymore???

There was no doubt that extraordinary times earlier this year required extraordinary measures and the SNB amongst others engaged in those measures
However the situation now, while not particularly good, is certainly more stable than we saw at that point. We have moved in this cycle from financial deleveraging to economic deleveraging. Economic deleveraging will likely take more time to run its course (by definition) and will probably (hopefully) be less volatile than the last 2 years.

However, unless we want to repeat the mistakes of the past we have to recognize that too much liquidity, too low interest rates, too easy credit fuelling too many assets bubbles are the issues more than anything that got us here.
At the same time as we need to repair the system we also need to protect it. We have seen a shift already develop in places like Australia, Brazil and even more recently the U.K. in this respect and suspect it will spread. Eventually even the U.S. will likely have to embrace this.

For now however the next domino in this process of shifting to a new and broader focus could come from the SNB. Quantitative easing and currency intervention were appropriate in March but it is very questionable whether they are anymore. The SNB is still likely the most credible Central bank on the planet. Exit the above strategies at this point is likely sooner rather than later and will likely only enhance their credibility.

We would not be surprised to soon see the start of a move lower again in EURCHF that could see us back towards 1.45 again in the months ahead.