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Swiss Nat Bank Ends Peg To Euro!


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The SNB just rang a bell. The era of central bank omnipotence is over! B)

Bruce Krasting:

Depends how -ve theyre prepared to go

Always seemed a bit daft a small CB like Switzerland going toe to toe against ECB. Bringing a knife to a gun fight.

Edited by R K
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I can't see it... new jobs... against the Swiss clinging on to their own jobs now? Can vaguely recall something in Neither Here Nor There (Bill Bryson 1991 - Travel book) how when last recession hit Switzerland, because limited residency rights, businesses and households let a lot of casual workers go... in number... and were pretty cold and ruthless about it. Perhaps even revoking their right/pass to be in country.

Keep in mind.. from 1991 and a travel book and humour based. Things changed a bit since then, seem to recall there some improvement for non-Swiss rights to remain in country, and perhaps fewer banks... recent US pressure was suggestive more Swiss banks would close. (Wow.. low or non-inflation preserves capital positions / allows wealth to be built). Snip of that part, mentioned above.

Switzerland

.. I suppose you have to admire the Swiss for their industriousness. Here, after all, is a country that is small, mountainous, has virtually no natural resources, and yet has managed to become the richest nation on earth. (Its per capita GDP is almost twenty-five per cent higher than even Japan's and more than double Britain's.) Money is everything in Switzerland - the country has more banks than dentists - and their quiet passion for it makes them cunning opportunists. The country is land-locked, 300 miles from the nearest sniff of sea, and yet it is home to the largest manufacturer of marine engines in the world.

..They have a terrible tendency to be smug and ruthlessly self-interested. They happily bring in hundreds of thousands of foreign workers - one person in every five in Switzerland is a foreigner - but refuse to offer the security of citizenship. When times get tough they send the workers home - 300,000 of them during the oil shocks of 1973, for instance - making them leave their homes, pull their children from schools, abandon their comforts, until times get better. Thus the Swiss are able to take advantage of cheap labour during the boom times without the inconvenient social responsibilities of providing unemployment benefit and health care during bad times. And by this means they keep inflation low and preserve their own plump, complacent standard of living.

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It went for small size CB's ages ago with the opening of the markets. Small size CB's such as swiss and BOE don't have enough firepower to fight the market (unless it involves them printing their own money).

US, China, ECB and BOJ are the only players now who have a chance. BOJ will fade. China will rise.

Several people here seem to ignore: the SNB did NOT run out of firepower because they simply needed to print their own currency to buy Euros. Therefore, this event also does not mark the end of CB omnipower, as a previous poster remarked.

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Several people here seem to ignore: the SNB did NOT run out of firepower because they simply needed to print their own currency to buy Euros. Therefore, this event also does not mark the end of CB omnipower, as a previous poster remarked.

What is the main implication of this event IYO? I admit it came out of the blue for me, and isn`t something that I could pin point as leading to X Y or Z. (except maybe a taster of what happens when the EZ disintegrates?)

Edited by dances with sheeple
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http://www.zerohedge.com/news/2015-01-15/did-snb-just-suffer-worlds-biggest-daily-loss-ever

Why did SNB move?

The SNB viewed expected global policy divergence to have a more sustained and growing significance and that this would make maintaining the EURCHF floor more difficult. While there seems theoretically no ceiling on balance sheet growth, the costs of maintaining a policy growing assets 2bn CHF a day for potentially the next few years was unpalatable and did not outweigh the costs to growth for the risks they create shortfalls later.

Also the interest rate differentials that were in place. However large they look by conventional standards as a deterrent to long CHF positions, they have little impact when here is a fear of a jump move in currencies, Grexit or intense capital outflows from Russia or elsewhere.

How big a hit on reserves?

By our calculation the FX reserves portfolio on FX alone will have lost in the region of 60bn CHF, assuming EURCHF at 1.03 and USDCHF at 0.88. Though some of this is likely to have gained on bond holdings, as per our above example, this would be far outweighed by losses on FX.

Anyone else got any figures on how much the SNB has lost on it's Euro holdings? Or should that be seen as zero because the SNB just printed the CHF in the first place?

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A negative rate of -0.75% isn't going to put people off if the currency is going up.

Yeah... bubble currency - imo.

They only remained independent because of their topography. No real resources. Companies perhaps set to go into recession. Other countries prepared to push them about a bit including recent-ish leak to Germany of savers, and settlement of tax owed by individuals. In the modern era they've relied on good will and perception of a safety, expertise/integrity in banking - backed of course by all the CHF money - from enemies... perhaps because some of the top people in other countries availing themselves of Swiss services? Will wait to see how move affects Swiss companies - recession etc - pushed around by US/Germany, or whether they are resourceful enough to overcome it.

The mountainous country of Switzerland was far more hospitable to small-scale farming that to the large feudal estate. Even so, it wasn't very hospitable. Farming in the Alps conferred a military rather than an economic advantage to small holders. The steep mountains and almost impenetrable passages effectively neutralised the advantage that heavily armed knights enjoyed over the foot soldier on flat terrain. After rugged Swiss fighters decimated an Austrian army in a mountain ambush in the thirteenth century, isolated Swiss communities were effectively freed from the political domination of the landed aristocracy who had held sway over much of the rest of Europe.

The basis of the later Swiss prosperity was laid in the late medieval period in which Swiss pikemen became the premier mercenaries of Europe. They rented their services for cash. then retired to unassailable redoubts in the mountains. The foundation of Swiss economic prosperity was the topographical advantage that enabled Swiss archers and pikemen to preserve their independence over the heavy cavalry that predominated elsewhere. (-Davidson)

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SNB b/s to end Nov 2014

http://www.snb.ch/en/iabout/stat/statpub/balsnb/stats/balsnb

Euros, USD mostly, and foreign gov bonds and a bit of gold and odds and sods (yen, ££)

So some losses on currency (but more or less back to start of 2014 Id imagine before Euro tanked)

Bunds at nominal value will be lower clearly also but probably not much compared to cost at time of most purchases.

Comparing values immediately before and after announcement (as I suspect Zero Edge etc would do) is risible frankly as are claims back up the thread claiming theyve been burning through reserves to maintain peg. Thats nonsense. They just printed chf.

Edited by R K
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Several people here seem to ignore: the SNB did NOT run out of firepower because they simply needed to print their own currency to buy Euros. Therefore, this event also does not mark the end of CB omnipower, as a previous poster remarked.

Markets determine the cost of money not central bankers. Jordan jumped because he'd been cornered and left with no better option.

Ernst Baltensperger, the doyen of Swiss monetary policy, flagged the move in an interview with the Neue Zurcher Zeitung on Sunday. He said the peg worked well at first but then became toxic:

1) It has created a flood of excess liquidity within Switzerland that will be increasingly hard to mop up once the tide turns, and velocity rises. The monetary base has exploded from 80bn francs to almost 400bn since mid-2011.

2) It has set off a property boom. Flat prices have risen almost 60pc since early 2007 on the Wüest & Partner index. Bank lending has jumped from an historic average of 145pc of GDP to a new peak of nearly 170pc. Such surges usually end badly.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11348809/World-deflationary-forces-have-swept-away-Switzerlands-defences.html

Loved Lagarde's face this evening when she confessed to being out of the loop! :lol:

http://www.cnbc.com/id/102341396#.

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http://www.zerohedge.com/news/2015-01-15/did-snb-just-suffer-worlds-biggest-daily-loss-ever

Anyone else got any figures on how much the SNB has lost on it's Euro holdings? Or should that be seen as zero because the SNB just printed the CHF in the first place?

I just think it is irrelevant - besides from being a figure in some report a few months from now.

The only real problem a central bank can ever have is to STRENGTHEN their own currency in a sustainable way. Essentially, they then need foreign assets (gold, currency) to buy back their own currency (i.e. their liabilities). This ability is obviously restricted by the amount of assets they hold. But guess what: the SNB has just increased their assets buy buying shed loads of Euros...

Another way to prop up the currency is interest rates, but without the assets to buy back this can never be sustainable. See BoE, 1992. It is funny that central bankers often seem to pretend as if the balance sheet was irrelevant and it was all about base rates. That is complete nonsense, as otherwise Zimbabwe's gazillion percent rate should have achieved something. The problem is of course, that everyone knows where these interest payments are coming from: fresh from the printing press. So, in the end, if you are in trouble, it always comes down to your assets.

The world's leading central banks seem to possess omnipower because all they have done so far is the easy part: create inflation by monetization/printing money. The real trouble will start if they have to do the opposite. It will be politically impossible, but they're balance sheets won't allow it either (show me the gold, show me the prime credit that can be sold in a crisis at high value). They wil be powerless.

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Markets determine the cost of money not central bankers. Jordan jumped because he'd been cornered and left with no better option.

Loved Lagarde's face this evening when she confessed to being out of the loop! :lol:

http://www.cnbc.com/id/102341396#.

Yeah, she looks like the Bogeyman just cut her stabilisers off with a chainsaw, lot more of this sort of shock and awe to come hopefully.

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It's just possible she didn't know but it's a bit unlikely as she's the Managing Director of the IMF. It wouldn't be the first time someone in authority has given the "I know nothing" response after an event to avoid responsibility/difficult questions etc etc.

Switzerland is on the IMF Board of Governors so it would stretch credibility if Switzerland did it entirely unilaterally and the IMF hadn't known what was going on and the background to it all.



http://

www.imf.org/external/np/sec/memdir/members.aspx

http://

www.imf.org/external/np/sec/memdir/officers.htm

The interviewer could have remarked that it would be a surprise if the IMF was entirely out of the loop but apparently he didn't.

Edited by billybong
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It's just possible she didn't know but it's a bit unlikely as she's the Managing Director of the IMF. It wouldn't be the first time someone in authority has given the "I know nothing" response after an event to avoid responsibility/difficult questions etc etc.

Switzerland is on the IMF Board of Governors so it would stretch credibility if Switzerland did it entirely unilaterally and the IMF hadn't known what was going on and the background to it all.

The interviewer could have remarked that it would be a surprise if the IMF was entirely out of the loop but apparently he didn't.

The interviewer and the "news" station just provide the platform for her type nowadays don`t they, there is no hard questioning of anything anymore, especially if it pertains to bankers? Is this a test run (one of many?) for the full break up of the EZ?

Edited by dances with sheeple
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Have they been informed that Germany is going to walk away from the party?

This was my first reaction. I mean if they know Germany were leaving then they had to pre-empt it. However, I think that they just played a blinder, 3 years of a peg buying EMU assets, making loads of money by being long duration and core yields crash. Now they have 500Bn of reserves and Draghi wants to buy 1Tn. It makes sense after front running them to want to sell him what he wants. Very clever.

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Reposting this from a private board I moderate. There's probably going to be a few days / weeks of fallout from this.

--------------------------------------------------------------------

The Good Stocks must now pay for the Bad Trades.

A retired Wall Streeter told me that this morning. This Swiss Franc thing was HUGE and totally unexpected leaving, as Warren Buffet famously, all the naked in the water when the tide went out. He said, "so please think about how they are positioned and what they are going to have to unwind."
Then Phil Davis said:
Needless to say, hedge funds who made the very usual, very normal short bet on the Swiss Frank are F'd this morning. As the Euro had been very weak recently, there were a large amount of short bets on the Franc (CHF) in expectations of the SNB stepping up their Euro-buying program to get back to their usual 1.20 goal.
those wrong way currency contracts (and there are 1M of them on this chart)lose $1,100 PER PENNY move. That's $22,000 on a 0.20 move in CHF x 1M = $22Bn in losses this morning for currency traders. Someone is gonna have some 'splainin' to do!
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http://

globaleconomicanalysis.blogspot.co.uk/2015/01/rabbit-hole-intervention-fails-wild.html

Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story
....

This move will shock all of Europe very badly. I doubt it could have come at a worse time. Europe was already heading for a serious recession. This shock wave will make matters worse. And to top it off, the QE coming from the ECB is doomed to fail. It too will make matters worse.
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