Notes From Underground

Jackson Hole is over and the ECB and BOE meet on Thursday so let’s take a minute and look at what is going on with the Swiss National Bank and the impact its EURO policy is having on world asset pricing. As the SNB maintains its present floor on the EUR/CHF cross rate–REMEMBER 1.20 is the level–the BANK is forced to continue buying EUROS to maintain the PEG. All those EURO PURCHASES have to go somewhere as the SNB does not want to be left holding the proverbial bag if the Germans say NEIN to the EU and the EURO would collapse. The SNB has been forced to buy German, Dutch, Austrian, French and Finnish sovereign debt, but with those instruments yielding negative rates on 2-YEAR NOTES the Swiss are forced to seek out alternative assets to alleviate the massive exposure to the peripheral sovereigns.

In a Bloomberg story from August 29,“$380 Billion Pile Makes Jordan Wonder How to Spend It,” the author, Klaus Wille, notes that Swiss policy makers “are finding it more difficult to find the right investments.” The Swiss have a problem because there is a lack of high quality assets to buy and if they diversify to aggressively away from the EURO by purchasing large amounts of AUSSIE , CANADA, YEN and others, the outcome will be that the SNB undoes its own policy by overtly driving the EURO lower and thus putting more pressure on the SNB to buy more EUROS to sustain the EUR/CHF FLOOR.

The vast SNB program has meant that SWISS FOREIGN RESERVES have grown to 60% of the Swiss GDP. As SNB President Thomas Jordan says in the article “… a large part of our foreign-currency investments are bonds issued by governments of the core euro area with very high quality.” Further, the SNB says that 86% of all BOND HOLDINGS ARE RATED AAA. Again, what appears to be a benign central bank policy is playing havoc with the world’s REPO MARKETS AS SO MUCH OF THE BEST COLLATERAL NEEDED FOR REPOS IS BEING HELD BY THE WORLD’S CENTRAL BANKS. My view on this as that the IMF and other GOLD HOARDS NEED TO BE USED TO CREATE GOLD BACKED BONDS IN AN EFFORT TO HELP ALLEVIATE COLLATERAL CONSTRAINED FINANCIAL MARKETS.

The Swiss are playing a very dangerous position both for its own economy and the global financial system. Today, SNB PRESIDENT Jordan gave a speech in which he reiterated  that, “In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy and would carry with it the risk of disinflationary developments.” To further substantiate the Swiss problem, its PMI was released today. The expected number was 49.2 but the actual number came in at 46.7. No relief in sight and as usual the EUR/CHF cross closed at 1.2010.

***FOOD FOR THOUGHT: Months ago I cautioned that the XSTRATA/GLENCORE merger would be an important barometer on the global mining industry. I thought Glencore was paying a huge price for an asset that they might be able to attain for less if global material prices began to fall. I was amazed that the Qataris were trying to block the merger because they thought XSTRATA shareholders were entitled to a higher price. The QATARI posturing, I thought, provided the GLENCORE MANAGEMENT with an opportunity to kill the deal and wait for lower prices and thus a lower value for XSTRATA.

It now seems that this deal may well fall apart, and as it withers on the vine of high hanging fruit, it may be another signal as to why the AUSSIE DOLLAR IS WEAKENING–for as usual, massive stock deals tend to signal tops and bottoms in markets. The AUSSIE BANK MEETS TONIGHT SO THE RBA STATEMENT NEEDS TO BE READ FOR ANY CONCERN ABOUT GLOBAL RAW MATERIAL PRICES. The market is currently pricing in NO CHANGE from the present OVERNIGHT RATE OF 3.5%. I think the current bout of AUSSIE DOLLAR WEAKNESS SAYS OTHERWISE. Must be why I wasn’t invited to Jackson Hole.

Tags: Australian dollar, BOE, ECB, EUR/CHF, RBA, SNB, Swiss 2-yr notes, Thomas Jordan, XSTRATA/Glencore

This entry was posted on September 3, 2012 at 7:49 pm and is filed under Currency, Debt Market, SNB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.