If the Swiss Can Do It, Why Can't We?

When the Swiss National Bank [SNB] intervened in the both the US Dollar / Swissie pair and the Euro / Swissie pair we called it a watershed event that the markets had ignored. Last week we began to hear the rhetoric that we cautioned against.

New Zealand Q1 GDP printed at -2.7% vs. -2.3% estimate Q/Q and Y/Y -1.0% vs. -0.7% estimate. This was the worst GDP print in 15 years which has not been lost on the politicians. The Finance Minister stated the strong New Zealand Dollar was acting like a “handbrake” on the economy. It is this type of rhetoric that usually precedes currency intervention. As we noted, the thinking is, “If the Swiss can do it, why not us?” Furthermore, we remind readers that the Prime Minister of New Zealand is the former head of Global Foreign Exchange trading at Merrill Lynch (MER).

In Japan deflation is the symptom and the prescription is the same as New Zealand and Switzerland. Japanese April CPI was reported at -1.1% at both the headline and core levels. The simple way to combat deflation is to weaken the currency.

The foreign exchange markets can now be divided into those countries that have an incentive to weaken their currency and those countries that either already have weakened or lack the ability. This pits the Eurozone and the US Dollar against the Yen, Swiss Franc and New Zealand dollar.

The US Dollar has already experienced significant weakness over the last several years and quantitative easing has raised the fear of inflation. It is unlikely that the US government would step in to weaken the dollar. Moreover, the global political backlash would be too great.

The Eurozone and the ECB find themselves in a precarious situation. Because of the disparate economic interests in the Eurozone it would be extremely difficult for the ECB to intervene to weaken the Euro. Moreover the ECB has been slow to respond to the global economic meltdown.

Last week the ECB began its campaign to pump liquidity into the financial system by extending 1 year loans at 1% to financial institutions. This is the first and closest form of quantitative easing that the ECB has embarked upon.

The net result is the Euro remains vulnerable to competitive currency devaluations. We remain long EURUSD with a short term bias and an initial target of 1.42. In Euro ETF (FXE) terms this translates into $142 initial target.

Disclosure: Long FXE

Comments

[Dave Wrixon:]

Probably just shows that New Zealand interest rates are too high!

The reason America cannot do anything is because she already has near zeo interest rates, is printing dollars like their is no tomorrow and the economy is still in free fall because consumers and government are both insolvent.

Jun 30 04:54 AM

[blanco-dee:]

I don't see any truth in the statement;

""It is unlikely that the US government would step in to weaken the dollar. Moreover, the global political backlash would be too great.""

that's exactly what is going on.

Why can't we be like the Swiss? The answer i we're just too large. Any comparison between the two is flawed by virtue of the scale of the USA.

I don't really see a point to this article.

BDO

Jun 30 08:31 AM

[jayminho:]

what will US do ? give money for buyers ?

Jun 30 08:48 AM

[jayminho:]

wow, just remembered, a sovit-union deja vu, the great miracle of comunism was that everyone had jobs (subsidized by the state, still, they had jobs) the problem is.. sooner or later the state got so "blown" by the fake unnecessary jobs it created.. it all collapsed.. deja vu ?

Jun 30 08:50 AM

[Ferdinand E...:]

Having lived in wonderful Switzerland for 3 years, I can answer your question. The Swiss don't tolerate certain things that Americans think of as freedom. They have - or perhaps had - a strange belief that stone age countries in the Third World should be allowed to do their thing without interference by Swiss soldiers, airmen, or official do-gooders. There are a large number of automatic rifles in Swiss bedrooms, but they are there to be used in defending the country, not working off person frustrations. Pornography and drugs - and I suppose gutter language - are present to a certain extent, but they have not been allowed to destroy the cultural basis of the country, as is the case in the good old US of A..

Jun 30 10:28 AM

[Jordan Lindsey:]

Because it is Bernake's intent on having a weak USD, that's why!

Jun 30 11:40 AM

[Jimbo:]

Ferdinand E. Banks: You forgot to mention the Swiss Navy.

Jun 30 11:56 AM

[snagglesnarf:]

Switzerland is a beautiful-looking country built on human suffering. Their banks are choked with money from tax evaders, dictators, drug dealers and human traffickers They probably still hold nazi gold. Their economy is completely different from ours

Jun 30 07:00 PM