Notes From Underground: Another Cold Day In July

In late July, Bundesbank President Jens Weidmann made a comment about being in favor of a rise in German wages. I was citing a Financial Times article, “Bundesbank Shifts Stance To Support Pay Rises.” The article opens with the line, “Germany’s Bundesbank has backed the push by trade unions for inflation-busting wage settlements …” I noted that it was Bundesbank Chief Economist Jens Ulbrich who called recent wage trends moderate, given the strength in the German economy. If the Bundesbank had capitulated on the wage issue look for ECB President Draghi to feel renewed strength in his efforts to weaken the EURO and placate French and European peripheries who have continued to complain about the impact from an overly strong EURO. (This was from the JULY 23 Notes from Underground).

Well today another cold day in July was revisited upon the markets as German Finance Minster Schaeuble reportedly said a lower euro would be beneficial to the German economy because of enhanced exports. Herr Schaeuble has been adamant in his opposition to loosening the budgetary rules to allow France, Spain and Italy more fiscal flexibility. It is very rare for a German finance minister to favor a weakening currency during times of prosperity and certainly zero interest rates. It raises the question if Germany has indeed capitulated to French and Italian cries for more stimulus in the euro zone. German acceptance of fiscal stimulus with an agreed real QE program may have been the reason for the European and U.S. equity rallies today. Attention should be paid to the idea of a weakened euro in response to agreed upon financial and labor  restructurings.

What it will mean for European bond markets will have to wait until after the results of the AQR on Sunday, but rumors are rife that the results will mean that European banks will need to raise more capital and the burden on the ECB will become ever greater. Also, pay attention to how German domestic banks fare under the ECB stress tests. In the mind of Mario Draghi, turning the screws tighter on German financials may result in increased empathy from the Merkel Government on the pain being felt by the peripheral economies.

In addition to the Schaeuble comments, there was a Bloomberg article by Catherine Bosley titled, “SNB Stands Ready With Further Measures If Needed, Zurbruegg Says.” Governing Board Member Fritz Zurbruegg put markets on notice that the SNB will continue to defend its 1.20 floor for the EUR/CHF cross (currently trading 1.2070). He said, “There’s no discussion, we will with the utmost determination make sure that the minimum exchange rate is not questioned, either with unlimited purchases of foreign currency, and if necessary we will take further measures immediately.”

It’s an interesting time for the SNB to get aggressive in its jawboning of its ridiculous policy of supporting the Swiss franc against the euro. If the ECB does something inane as far as QE, how does the SNB respond in kind? The Swiss have tied themselves to a bank that is groping in the dark for its best policy. Complicating matters for the Swiss National Bank is the Swiss referendum scheduled for November 30. The Swiss citizens are being asked to vote on a national GOLD policy for the SNB. It is a three-pronged issue:

  1. Hold all of Switzerland’s gold reserves in Switzerland;
  2. Raise gold holdings to 20% of the SNB’s  total reserves;
  3. Never sell gold ever again

It is the second point that can really cause great havoc for the SNB as it continues to increase its reserves in defense of its 1.20 EUR/CHF policy. The SNB has been openly opposing the referendum and Swiss business has also been politicking against the referendum’s passage. But the current Swiss policy of increasing the SNB‘s reserves in an effort to keep downward pressure on the SWISS FRANC can become very problematic for global markets. Remember, ECB QE automatically becomes SNB QE … yet again.

***Tomorrow morning the Bank of Canada will announce its rate decision at 9 a.m. CST. It’s expected that the BOC will keep rates steady at 1.00%. The most interesting part will be if Governor Poloz moves to remove “forward guidance” from future releases, which would be the beginning of other central banks dropping the language of “forward guidance” and truly becoming more data dependent without an authorized time frame.

Tags: , , , , , , , ,

9 Responses to “Notes From Underground: Another Cold Day In July”

  1. Joe Says:

    Re: Swiss Referendum on Gold policy. Perhaps after Halloween the business press will believe its actually a real referendum.

  2. Joe Says:

    Web article on the Swiss referendum:

  3. Yra Says:

    Thanks for the very relevant post Joe

  4. Alex F Says:

    Gold referendum seemingly unpriced in FX. I guess the market is tired of referendums.

    Also the banks who failed AQR will find out earlier than Sunday so there may be some price impact today or tomorrow.

  5. yra Says:

    Alex–the market my be tired of referendums but it is taken palce and the swiss financial kings are very worried about it.When it comes to Europe’s stress tests everything gets leaked because too many people are “privy” to the results because think how many people working for the ECB and in Brussels know the results

  6. Chicken Says:

    Seems like the SNB’s plan would fall apart if this referendum actually passed?

    I guess the dummies chasing stocks are gonna get whacked once the AQR is announced? ie:Run equities up and get them chasing.

    My head is spinning over here just watching these +300 and -300 the following day, LOL.

  7. bigred Says:

    Yra…I heard you comment regarding the Yuan /gold relationship.
    You did no there something that concerns you there??

  8. Yra Says:

    Bigred—here is my thoughts on that—November 3r 2009,the IMF agreed to sell 200 tons of gold to the Indian treasury at the price of 1048 in U.S. dollars–the Chinese were displeased because they had apparently wanted to buy a large chunk of gold from the IMF but were rebuffed—the price at that sale would have been 7150 yuan to an ounce of GOLD–in Gold’s recent weakness it has tested the Chinese yuan price twice,most recently on its visit to its recent low of $1183.30—-if China was originally willing to pay that I find it is a level of support that has prove itself over the last two years so if you are looking for technical support I find that of interest–if it violates that level on a weekly close I would not be looking to get long gold until other technical levels of support appear or some new fundamentals give rise to Gold as a monetary safe haven.

  9. bigred Says:

    thank you for the clarification

Leave a Reply

%d bloggers like this: