In my last Instablog entry I anticipated currency wars as one of five major themes/danger zones for 2015.
A few days later reality overtook my writing process:
The Swiss National Bank (SNB) news did sort of frontrun me last Thursday concerning an article I was about to publish...too bad it became next to useless after the peg was removed on Jan 15, 2015.
I will nevertheless past my article draft below:
The SNB has their hands increasingly tied. A move is necessary because of three reasons. I anticipate a modification to the PEG (more on the three scenarios later) in the coming days because of:
- Increasing mark-to-market losses and interventions in late 2014 (for example due to the Ruble crisis and growing unease in Europe, resulting in a weaker EUR). The SNB balance sheet volume would be soon close to the annual GDP in Switzerland, it was about 80% already. That's simply huge compared to other central bank balance sheets:
To be fair, the SNB already had similar inflows in their stats back in 2012 already - but at that time the balance sheet was slower. IN addition, two upcoming events in 2015 probably made the SNB fear that the worst is yet to come:
- German courts strike down appeal against (government) bond purchases by the ECB, clearing the last hurdle for QE moves by the ECB, likely coming by Jan 22 2015 already. The SNB stressed in their press conference that this court decision had "absolutely no influence" and was a "pure coincidence". I simply don't believe that.
(Various journalists were reporting secret meetings last weekend between SNB and ECB executives, the ECB informed the Swiss side last weekend about upcoming QE, but not the other way around. *)
- A possible "Grexit" or a "Grexit-light" with capital control or similar (depending on the early 2015 Greek election outcome) and further possible turmoil in the EUR in the Southern areas.
All this would have lead to an even higher pressure on the EURCHF @ 1.20 barrier by late January, time was ticking...
The SNB would have had to stem additional inflows of billions of EUR in the coming weeks.
In addition, the USD was getting stronger against the Swissie (stronger divergence in USDCHF to EURCHF) and the slight negative rates imposed by the SNB ( -0.25%) in December 2014 weren't getting enough traction (now lowered further to an average of -0.75% as of today on big foreign deposits in CHF).
I anticipated the timing (a move in the next few days) but judged the probability of the first two scenarios as more likely than what was announced yesterday (scenario 3):
- Scenario 1: Peg the CHF to a newly announced basket, for example including stronger USD and weaker EUR instead of just the EUR (peg modifications)
- Scenario 2: Hike negative interest rates for big CHF deposits further, a second increase after the first one in December 2014: http://bit.ly/1sFuXLd (SNB announcement). There were many critics lambasting the effectiveness scenario 2, a good summary can be found here: snbchf.com/2014/12/snb-introduces-teathl.../ (snbchf also includes a link to a critical paper from a cantonal bank, penned back in September 2014).
- Scenario 3: Nuclear option, do away with the peg
Scenario 3 it was - and the financial world was stunned (except for a few commentators such as Jim Grant and Martin Armstrong).
I was only going to include scenario 3 as an outlier in my article compared to scenarios 1 and 2, I readily admit that as an "after action review". In my opinion, scenario 1 was the most likely (I got the timing almost right, but the scenario probability wrong).
Needless to add that the actual fallout of scenario 3 was huge. A few charts from Bloomberg here:
Several FX brokers blew up based on customer losses (the double-edge sword of triple-digit leverage at FX brokers outside the US):
By the way, who were the geniuses who put EURCHF @ 1.19xy stop-losses with no limits into their systems?! That apparently included both retail investors and professionals. Of course the move was so fast and brutal that first trades after the news were executed around parity only - after a fall of almost 0.2 CHF!
In addition to losses at FX brokers, macro hedge funds (only one prominent example was made public so far, I'm sure a few more will follow and wind down) also blew up:
Was this just the first shot fired?
I expect more currency wars coming with higher negative interest rates in many economies around the globe in 2015, particularly in Asia (China, Japan, Korea....Japan already started this in late 2012).
Last but not least, the Swiss move may also have some minor influence on FED decisions later this year:
Currency wars are coming. Will the U.S. Federal Reserve's interest rate moves make it worse?
* There were leaks this weekend that the Germans and Dutch (finally) agreed to a compromise that goes like this:
The week is ending with an ECB #QE leak-fest:
* no Greek bonds
* max 25% of any country's debt
* national CBs doing the buying
Props to The Economist being able to stuff all the relevant rumors into a single tweet!