What the Swiss Franc Appreciation Means

https://foreignpolicy.com/2015/01/16/what-the-wild-swiss-franc-appreciation-really-means-currency-wars-federal-reserve/?utm_content=buffer0ea36&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

by kposehn • 12 years ago

68 50 12 years ago

foreignpolicy.com

rsync• 12 years ago

"To put the Swiss franc move in perspective, in the currency cross rates for free-floating major foreign exchange currencies — like the Swiss franc or the U.S. dollar, the euro or the British pound sterling — a 2 or 3 percent move would be considered big. A 20 percent move is outlandish, a freak black swan event without precedent."

It's not a black swan event if it was predicted, widely, well in advance. Smart, reasonable people declared the policy unsustainable from day one. One good example being Mike Shedlock at globaleconomicanalysis.blogspot.com.

junto• 12 years ago

Genuine question then. If you had money to burn (I.e. gamble) where would be the smart place to put it over the short to medium term, and see a tidy return?

dia80• 12 years ago

not somewhere someone in internet comments told you to put it

pravda• 12 years ago

Bitcoin! At least that's what they tell me at /r/bitcoin.

adam419• 12 years ago

You're missing the point of a black swan. An event is a black swan to the Turkey, not the Butcher.

math• 12 years ago

How do you know that you should listen to Mike on this but not the things he said that turned out to be wrong (seemingly more than half lately)?

https://www.backrecord.com/person/mike-shedlock-(globalecono...

Mvandenbergh• 12 years ago

It doesn't even have to be predicted to not be a black swan. To qualify it has to be so far outside the range of events accepted as likely that it breaks models used to mitigate risk. This was nothing like that.

A 20% move in a cross between two free floating currencies probably would qualify because the only things that would cause it are catastrophic events (themselves black swans).

A 20% swing after a peg is dropped is exactly the kind of thing that a model would predict, therefore this could only be a black swan if the peg being dropped was absolutely unthinkable which it obviously wasn't.

kephra• 12 years ago

I wont call the Swiss decision a currency war. Swiss decided for itself, that it wanted to float the Franc again.

But we had a currency war at 16th December 2014 when Rubel dropped by nearly 40% on one day, and went up again next day. This was a currency war against Russia that failed. Russia had to push about US$100 billion on the market at that day, to win this currency war. The other side therefor was likely also a state owned player.

pas• 12 years ago

It was most likely investors pulling out even more money from Russia and Russians buying foreign currency.

valas• 12 years ago

Someone: can you explain why Swiss National Bank could not sustain keeping the value if Frank low against Euro? It seems like the only thing they need to do is to purchase more Euros with Francs they print, right?

I usually see the opposite, where the country, like Russia for example, is unable to keep its currency high, because they don't have enough foreign currency reserves to buy their own national currency.

perlgeek• 12 years ago

It seems like the only thing they need to do is to purchase more Euros with Francs they print, right?

They likely have a policy against printing Francs in arbitrary amounts to not endanger the long-term trust in the currency.

sandstrom2• 12 years ago

This is the reason the bank gave:

    In a statement explaining its policy, the SNB points to divergence among major 
    economies; in particular, the weakening euro which has hit about the lowest 
    level since its inception.
    
    With anticipated cash injections by the ECB, the euro is expected to depreciate 
    more against the US dollar and as the franc is pegged to the euro, the 
    Swiss franc is weakening versus the dollar too.
    
    So, they conclude that there is no longer "exceptional overvaluation" of the 
    Swiss franc that justified the minimum exchange rate.

fiatmoney• 12 years ago

It's difficult to un-print money, especially when it's traded away for other currencies. That means you don't necessarily want to finance a move to temporarily drive down the price of your currency by expanding the money supply - if you think you're defending it against a short-term fluctuation (eg, a flight-to-safety from Euro-denominated banks), excess printing will cause the value to be much lower after the transient circumstance has passed.

vegabook2• 12 years ago

Seigniorage, the ability of an institution to print a worthless piece of paper that other people believe is worth something, is a very valuable power, one which is earned over decades, even centuries, of prudent policy. You don't want to mess with this by printing billions, at the risk of destroying your reputation (resulting in inflation, and/or speculation against your currency, as others have pointed out).

More prosaically, also, every time the SNB prints a swiss franc, that piece of paper is marked as a liability on its balance sheet (and the corresponding euro amount purchased is the asset). So they optically "lose money" if their assets decline in value versus their liabilities, as happened last week. Of course, they could then print more CHF to cover the loss, but then we're back to my first point.

Finally, and as an aside, the biggest loser in this whole thing was of course the SNB itself, at least on paper. It has CHF liabilities and foreign currency (and gold) assets to the tune of 500bn dollars. On paper then that was a 75bn USD loss. Conversely, and this is worth keeping in mind amidst the frenzy of headlines about broker losses, remember that markets must net off, so all those swiss francs that the SNB sold to defend against appreciation, were held by the market (individuals, brokers, funds, corporates, other governments). Thus it is likely that there are some huge winners out there, whose net wins are greater than the net losses to the tune of about 200bn * 15% (the amount that they intervened in the past 2 years * the percentage move).

anonymousDan• 12 years ago

Just trying to understand why when the SNB prints CHF it becomes a liability. Is it because whoever they sell it to (in return for some asset such as Euros) can at least in theory redeem the CHF as gold?

fla2• 12 years ago

Yes but you can't just print currency indefinately. And with the current economic situation of Europe, you don't want to have too much euros in you reserve either.

hristov• 12 years ago

It wasn't really inability as much as unwillingness. Yes, you are right all they needed to do was purchase more euros. They kind of decided that is not a good idea anymore.

Kenji4• 12 years ago

This is the true reason: https://news.ycombinator.com/item?id=8910109

sandstrom2• 12 years ago

# It was expected

I think it was expected from the outset that this would be a temporary peg/floor. There has been recent hints on this.

# It's not a war

Also, this isn't a 'currency war' in anyway. If there is any adjustment that other countries typically dislike it's devaluations, since that'll make their currency relatively more expensive, causing a short-term disadvantage for exporters [whom often line politicians pockets]. This was the opposite, a revaluation (or correction).

Inconsistently people called this a 'currency war' when the floor was introduced too[1].

# Losses

Sure, a few companies were bankrupted because of risky speculation, that happens all the time. It was foolish to believe that this floor would exist indefinitely, and thus any position making that assumption would obviously be very risky.

Interestingly people lost money[2] when the floor was introduced only 3 years ago. Sometimes memory is short.

[1] http://citywire.co.uk/money/have-swiss-won-currency-war-with...

[2] http://www.dailymail.co.uk/news/article-2037632/Kweku-Adobol...

Fizzgig5• 12 years ago

Sorry to disagree, but:

#It's not a war

Yes, yes it is. Has been since the 70's. Anyone who tells you that currency markets aren't a function of State Power doesn't know what CB's do[1][2]. [The public side to this story is that the IMF wasn't informed prior to the move - work out why].

#Losses

Heavily leveraged FOREX companies (aka day babies) were taken to the cleaners, and some banks / funds who had positions lost out. Look at the # of positions that were closed out for the real story.

#Russia

It's interesting to note who holds what in Swiss Banks, and in CHF. Just a thought[3][4]

#HappyCamperFunTimes

Rumor has it that HFTs are going to be heavily ganked very soon, to the tune of 60% through-flow. You didn't hear that here.

[1]http://www.telegraph.co.uk/finance/2773265/Billionaire-who-b... [2]http://www.cfr.org/about/membership/roster.html?letter=S [3]http://www.theguardian.com/world/2010/dec/08/wikileaks-us-ru... [4]http://itar-tass.com/en/economy/769344

beagle32• 12 years ago

Rumor has it that HFTs are going to be heavily ganked very soon, to the tune of 60% through-flow

Ganked in the "stolen" sense, or in the "outnumbered" sense? Neither makes sense to me. I'm not hearing this here, but .. can you elaborate?

cynicalkane• 12 years ago

My impression is that economists generally thought the Swiss central bank would keep the peg, because why wouldn't they? There's no economic law stopping them and it was obviously good for the Swiss economy.

The fear of central banks with large balance sheets is a powerful political force, one that economists don't really appreciate. The rational thing would be to keep the peg (or even better, target inflation or NGDP) but an unfortunate majority of politicians and voters are fearful of "printing money". Just as central banks around the world keep making the mistake of allowing falls in the inflation rate during a recession, economists keep making the mistake of assuming the next central bank will listen to them.

Fizzgig5• 12 years ago

That's insane.

No-one, and I mean [b]no-one[/b] thought the Peg would be kept.

The issue was how it was broken, nothing more.

http://www.ft.com/cms/s/8084cc9a-9cc5-11e4-971b-00144feabdc0...

http://www.telegraph.co.uk/finance/economics/11353686/QE-or-...

http://www.telegraph.co.uk/finance/economics/11321355/Mario-...

fla2• 12 years ago

Keeping the peg means buying more and more euros. It's not sustainable.

joshdick• 12 years ago

Clearly markets weren't expecting the change, or else they wouldn't've been so volatile after the announcement.

dagw• 12 years ago

They were expecting it long run, they just weren't expecting it that day. If you'd asked people last week if the peg would still be in place 10 years from now, most people in the market would have said "no". If you'd asked them if would still be in place 10 days from now, most would have said "yes".

ScottBurson• 12 years ago

Paul Krugman's take: http://www.nytimes.com/2015/01/16/opinion/paul-krugman-franc...

notatoad• 12 years ago

Good news for ski racers - FIS prizing just got significantly more valuable.

kchoudhu• 12 years ago

Finally, news about financial markets from a source that knows what it's talking about.

lisa_henderson4• 12 years ago

Anyone who thinks the that the peg was unsustainable should remember a basic bit of supply of demand.

Assume the demand of Swiss francs is "x".

Assume the supply of Swiss francs is "y".

If the price of francs is higher than what Switzerland wants, then:

x = y + z

where z is the amount needed to match supply with demand.

In that circumstance, Switzerland can print z amount of francs -- that is entirely sustainable. And that is what it was doing for the last few years. Keeping the price stable is the same as saying that it was printing z amount of francs, so that y+z equalled x.

Anyone who says this was unsustainable is simply not thinking clearly.

Kenji4• 12 years ago

No it's not that simple. Since Switzerland was fixating 1EUR = 1.2CHF there was a new problem arising when the US dollar went up: Arbitrage. People could exchange USD into EUR and then into CHF (source: Official statement of the Swiss central bank). The result: The Swiss Franc was pegged to the USD as well. Now that's some serious pressure, and that's why the Swiss central bank decided to give up on this unsustainable endeavour. And your calculation is nice and dandy, but if z grows too large then you get a massive inflation which is very damaging.

lisa_henderson4• 12 years ago

About this:

"if z grows too large then you get a massive inflation which is very damaging"

No! No! No! I am surprised there are so many people on Hacker News who are bad at math. You can not get inflation unless:

x < y + z

but what I wrote was:

x = y + z

you can not get inflation while that is true. Remember, you face deflationary pressure for as long as:

x > y + z

and that is what Switzerland was fighting. Not inflation, but deflation.

gonvaled• 12 years ago

This is funny:

Central banks are political entities which exist at the behest of government. And as such, they will always need to be mindful of politics if they are to maintain political favor and to keep their independence.

So, to remain independent they need to be dependent of politics.

alfonsoramos• 12 years ago

No problem if ths swiss bank had continued printing francs. E1, E2, E3 and so on in USA make clear the hyperinflation risk doesnot exist in this case. But there will be much harm in swiss companies. Exports in Swisszerland means 70% of GDP. And much harm in Poland and other countries with households buying their homes n swiss franck. So, problemes for their financial systems.

What the Swiss Franc Appreciation Means

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