At one point the SNB's sudden announcement to decouple from the EUR at its target rate minimum exchange rate of 1.20 francs against the euro' had sent the CHF soaring to a staggering 30 percent rally on Thursday to the 0.8517 against the common EUR currency. The CHF dramatic rise was the highest ever 24 hr recorded volatility on the CHF since 1971.
In stunning trading action several currency brokers were wiped out. and a New Zealand trading house is already rumored to close on massive losses. Currency trading powerhouses FXCM and Saxo also announced massive losses this morning.
Such measures of throwing massive amounts of public money are certainly reminiscent in my mind of the 1992 ERM crisis where the British Exchequer threw some 30 billion Sterling to keep the value of Sterling artificially high to the Deutschemark in the precursor to the EUR.
For the last 3 years the SNB had thrown huge sums of public money to defend the vitality of Swiss exports ads well as the domestic tourism industry.But the question begs of itself - should the market perceive Switzerland as a natural safe haven for investments traditionally during moments of crisis as much as that other well known safe haven Gold, then would it really be worthwhile to throw tons of public money in pursuit of an argument that cannot be sustained the long run.
Famous investor Jim Rogers had actually pointed
to this coming scenario and he wrote about it in
his 2013 book -
Street Smarts: Adventures on the Road and in the Markets
Buy now at Amazon -
http://www.amazon.com/Street-Smarts-Adventures-Road-Markets/dp/0307986071
Excerpts -
"Some of Switzerland's most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established."
"Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels."
"In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011."
"It was a "massive overvaluation," according to the country's central bank, the Swiss National Bank (SNB). Under pressure from the country's exporters, the SNB announced that "the value of the franc is a threat to the economy" and said it was "prepared to purchase foreign exchange in unlimited quantities" in order to drive the price down."
"A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency."
"One of two things is going to happen."
"In the first scenario, the market will continue to buy Swiss francs, which means that the Swiss National Bank will just have to keep printing and printing and printing, and that will of course debase the currency."
"The alternative scenario is what happened in July 2010, the last time the Swiss tried to weaken their currency. They did so by buying up foreign currencies to hold against the franc-selling the franc to keep the price down. But the market just kept buying the francs, and the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort. At that point, when the bank stopped selling it, the Swiss franc rose in value, all the currencies the Swiss had bought (and were now holding) declined in value, and the country lost $21 billion. In the end, the market had more money than the bank, and market forces inevitably prevailed."
Market wisdom from a savy investor who has seen it all since the original ERM debacle, Jim Rogers indeed.
Currencies should be allowed to float freely as market opinions dictate the value of a currency. Government cannot artificially determine the value of their own currencies we have seen that time and time again in history. To stand in the face of public opinion in my mind would be very much like throwing a baked bean at a charging rhinoceros, quite literally. The result - a stunning debacle for the SNB. But the politics of economic growth could make the allowance for a high valued currency intolerable. Should the world regard the Swiss Franc as a safe haven in times of trouble why would the SNB try to dissuade public opinion from what has been an age long vote of confidence to the Swiss currency and it's governance? To do so would prove a costly exercise in futility indeed. Rather than throwing good money trying to change global perceptions perhaps the SNB should have explored other means for boosting the Swiss economy in view of the international vote of confidence given to its currency. IMF Managing Director Christine Lagarde was deemed to have delivered the biggest understatement of the day, when in an interview with CNBC she stated that she found it all “a bit surprising”!
Pieter Bergli - DeLoren Trust Holdings
Forex education - the currency markets explained
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