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Will the Swiss Intervention Work?

Markets, driven by greed and fear, seem to have had enough fright this week, and equities, at least, are enjoying a turnaround Thursday.  In the us, the Dow average has clawed back and recaptured the top side of 11,000.  Stories of the pending economic collapse are less frightening when repeatedly told.  Besides, there are many betting markets are going down, not up, so it is best to question the source.

Market corrections, in the computer age, may have made corrections quicker, and perhaps steeper.  When an account has a margin call or goes debit, the computer is a lot quicker with the calculations, than were the grumpy old margin clerks.  To meet margin calls, positions are liquidated, often profitable ones as well as losing positions, to reduce market exposure, and to free money.  Yesterday, for example, the CME reported the open interest in all currencies except the yen went down yesterday, as traders took money out of the markets.

Intervention in the markets has been very fashionable this week, with billions being thrown at the market, often defensively,  The European Central Bank has been one of the biggest interveners, aggressively exchanging euros for Italian and Spanish debt issues in the secondary market.  The trigger for the ECB buying binge seemed to be the yield on ten year paper.  A yield over 6% seemed to cause central bank intervention. 

The ECB injection of billions of euros into the economy has been a stabilizing force for the euro this week, as has been today's intervention by the Swiss National Bank.  The rapid appreciation of the franc, worshiped and purchased by the haven buyers and currency speculators alike, had made this one of the most overvalued currencies.  Commerce is Switzerland was going to come to a halt.  With soft drinks or a beer costing over $10, and a three mile cab ride costing $100, tourist were no longer coming to Switzerland.  Exports from Switzerland, payable in the high priced franc, were slowing, and the Swiss were crossing the border to shop in the eurozone.

Banking, a large important segment of the Swiss economy, is also at risk.  In 2008, when Swiss lending rates were much less than rates in much of Eastern Europe, Swiss real estate loans were very popular in Hungary, Austria, Poland, as well as other countries.  Not a good decision, the few francs they saved on interest has been far exceeded with the hundreds of francs they lost on the exchange rate. 

In the summer of 2008, when these loans were being made, the euro bought 1.62 francs compared to the current level of 1.0850.  Hungary alone, was estimated to take out 700,000 loans during this period.  It takes a lot more Hungarian Forints or Polish Zloties to repay those franc loans.  Further, are those real estate markets any different than many others in the world?  Are the buyers, like so many elsewhere, upside down?  Swiss bank foreclosures in Budapest sounds like messy business.

Interventions do not often work, causing the central bankers to lose money, but the SNB may have a choice of losing money via intervention or losing money bailing out Swiss banks with bad real estate loans.  More is at stake here than merely the level of the franc, and a weakening global economy would hurt the Swiss bankers hard.

For those fortunate enough to take the big ride in the Swissie, it seems best to take your profits and move on. 

In our note yesterday, we recommended selling the euro and buying the Aussie.  It is working today but this trade should have more to go, perhaps down to 1.3350 from the current level of 1.3750.  You might also consider selling the GBPUSD currently around 1.5660.  Better global equities may give the A$ a boost.

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Will the Swiss Intervention Work?Will the Swiss Intervention Work?Will the Swiss Intervention Work?