lunes, 19 de enero de 2015

lunes, enero 19, 2015

Switzerland 'capitulates' on franc as global currency wars take next victim

The franc soared 30pc in one of the wildest days in Swiss history after the central bank abandoned its currency cap to avert mounting losses

By Ambrose Evans-Pritchard

9:13PM GMT 15 Jan 2015
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table football with players substituted by replicas of Swiss Franc notes in Lausanne
Table football with players substituted by Swiss franc notes. The Swiss monetary base has exploded from 80bn francs to almost 400bn francs since mid-2011 Photo: AFP
 
 
Switzerland’s currency defences have been smashed by safe-haven flows from across Europe, setting off a day of historic mayhem on Swiss financial markets and threatening to engulf the country in a deflationary vortex.  
The franc surged 30pc against the euro in early trading after the Swiss National Bank stunned traders by scrapping its three-year currency floor and freeing the exchange rate, forcing a desperate scramble by hedge funds to cover exposed positions on the futures markets.
 
"If the SNB thought that it could make this adjustment in an orderly manner, then it has failed miserably," said Kathleen Brooks, from Forex.com. The franc ended the day up 17pc.
 
The SNB slashed its key interest rate to an unprecedented level of -0.75pc to offset the shock effect of automatic monetary tightening, but even this may not be enough to deter capital. Willem Buiter, from Citigroup, said the Swiss could cut rates to -5pc. “That would bring down the franc,” he said.
 
The move came three days after a top SNB official vowed that the peg would “remain a pillar of our monetary policy”, and a month after the bank warned of a dangerous deflationary spiral and “drastic cost cuts” if the 1.20 floor against the euro were broken.

Thomas Jordan, the SNB’s president, denied that the volte-face was a “panic reaction” and apologised for the subterfuge. "You can only end a policy like this by surprise. The whole international situation has changed,” he said.
 
“The SNB has lost the trust of the markets” was the angry headline across the front page of the Neue Zürcher Zeitung. Even the economy minister, Johann Schneider-Ammann, was shocked, grumbling bitterly that it would make it even harder for exporters to keep afloat.
 
A flow of money from Russia – and lately Greece and even Italy – has made it increasingly hard for the SNB to hold the line. Full quantitative easing by the European Central Bank as soon as next week threatens to overwhelm Switzerland and may have been the final trigger.





Jeremy Cook, from World First, said the retreat was a “total capitulation” in the face of forces that are too big even for a central bank with plenty of firepower. “Nobody wins when you stand in the way of a freight train, except for the train.”
 
The SNB could in theory have held the line forever by printing unlimited amounts of money but the side-effects had already become toxic. Spasms of currency intervention have caused foreign reserves to reach 73pc of GDP.





This in turn has caused the Swiss monetary base to explode from 80bn francs to almost 400bn francs since mid-2011, accompanied by a torrid property boom and jump in bank loans to a modern-high of 170pc of GDP.
 
“They have had to throw in the towel. This is going to cause extreme pain for parts of the Swiss economy but the SNB are trapped,” said David Owen from Jefferies.



Nick Hayek, head of watch maker Swatch, said the collapse of the floor would cause havoc for Swiss manufacturers. "Words fail me. Today's SNB action is a tsunami; for the export industry and for tourism, and for the entire country," he said.
 
"It’s a serious threat for tens of thousands of Swiss jobs," said Christian Levrat, leader of the Swiss Social Democrats party.
 
The Swiss stock market plummeted 8.7pc, at one point suffering the biggest one-day crash in a quarter of a century. Exporters and banks were hit hardest, with Swatch down 15pc and UBS down 11pc.
 
Analysts were baffled as the SNB tried to play down the drama and as it suggested that the rising dollar has reduced the overvaluation of the franc. Citigroup said the real exchange rate had in fact appreciated by 1pc over the past year even before Thursday’s move. It is now trading at 38pc above its decade-long average.




The Swiss economy is growing at 1.5pc but the KOF index of business sentiment has been trending down for almost two years. The country faces the risk of a nasty hangover from its domestic credit boom that could prove treacherous at a time when the franc is soaring and monetary levers no longer work.
 
Gabriel Stein, from Oxford Economics, said the franc is now likely to strengthen relentlessly, pushing the country into a “prolonged bout of deflation”. If the currency reaches $0.70 to the US dollar it would cause a deep recession, with deflation nearing -3pc by 2016.
 
Professor Ernst Baltensperger, Switzerland’s leading currency expert, said the euro floor worked well at first but was becoming a danger in itself. The greater the excess liquidity, the harder it is to mop up when the tide turns, and monetary velocity rises.
 
The SNB’s meddling with market forces has set off a populist backlash from the cantons.

Voters fear that the bank will be swamped by losses on its books, tantamount to a fiscal liability. There are already reports in the Swiss press that the bank "lost" 60bn francs in Thursday’s trading.
 
“Huge foreign exchange reserves with a non-permanent peg always carry an inherent loss, due to materialise when the peg is abolished,” said Mr Stein. The SNB may have decided to take its punishment before it is too late.
 
The traumatic day in Switzerland has exposed limits of central bank power. It is a foretaste of how difficult it is becoming for countries to resist the tidal force of devaluation policies and currency warfare as deflationary forces sweep the world. The monetary hegemons are left having to pick their poisons.
 

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