Notes From Underground: Another G-20 Communique … Yada, Yada, Yada

The gathering in Brisbane, Australia provided a backdrop for the world’s leaders to reveal their warm and fuzzy sides to the cameras as koalas were distributed for “hugs for the home folk”–see we really care about nature and the environment. As usual, the G-20 meeting ended with the release of a leaders’ communique, which provides areas of future “cooperation” for the global hegemons. The typical areas of concern about the environment and the diminution of fossil fuels are stated, as are areas of concern about the international tax system and globalized funding of terrorism and money laundering.

But most important are the promises about harmonized efforts to secure global growth. The first paragraph of the communique says, “The global economy is being held back by a shortfall in demand,while addressing supply constraints is key to lifting potential growth.” What does this sentence even mean? I know the first part is a direct slap at Germany and China but I am at a loss in understanding the supply constraints. The constant criticism from the Keynesians is that we are in a world of “secular stagnation” so what is the issue of supply constraints even mentioned when searching for growth?

There is a pledge of cooperation but notice is paid to the domestic needs of G-20 participants. “We will monitor and hold each other to account for implementing our commitments….” Really, will the G-20 force China and Germany to expand domestic spending and bring balance into the international economy? This is difficult for even Brussels cannot bring about a change in Germany’s efforts to generate savings over domestic consumption. Pushing China to change will be done to meet the needs of the Chinese and not the demands of  toothless international organizations.

The United States Treasury annually fails to name China a “currency manipulator” so what do the opinions of the G-20 accomplish? The only real agreement coming forth from the G-20 was the criticism of Russia and Vladimir Putin. The end result was Putin got his picture with the Koala and then headed home early in an effort to “get some well needed rest.” To sum up: Another superficial attempt by the world’s leaders to appear important to their voters back home, all the while agreeing to issues that are not in their constituents best interests.

***There is great importance in the Swiss france/euro floor of 1.20. From its inception, the purpose of Notes From Underground to share the thought process of a global macro trader with investors searching for profitable opportunities without just being a tout and providing price points for entrance and exit into trades. The present importance I place on the Swiss National Bank’s efforts to maintain the EUR/CHF cross at the 1.20 floor is another example of why this policy may provide a real-time peek into the global macro world and all its potential profitable outcomes. The more I analyze the SNB‘s efforts to intervene to protect the 1.20 level the greater my bewilderment. Since the inception of the efforts to keep the Swiss franc from appreciating against the euro in September 2011, the cross has traded between 1.20 and 1.2650.

Up until now, the only period when it looked as if the SNB‘s policy was under assault was in 2012 prior to the “whatever it takes” comments by ECB President Draghi. The pressure on the SNB in 2012 was great as it was forced to increase its balance sheet over 60%, from 257 billion to 432 billion in foreign currency investments. Since the EURO and EU sovereign debt markets have stabilized the pressure on the SNB has lessened and during the last 20 months its balance sheet has risen by a slight 12% in an effort to sustain the peg. The current amount of foreign currency investments by the SNB is 471 billion. BUT WITH ALL THIS SELLING OF SWISS FRANCS AND THE PURCHASE OF FOREIGN CURRENCY INVESTMENTS LEADING TO A SWELLING OF ITS BALANCE SHEET, THE EUR/CHF CROSS REMAINS AT 1.2015 AS OF FRIDAY’S CLOSE. THE SNB’S POLICY IS A FAILURE!

The problem for the markets is what will result from the failure? What will be the ramifications if the SNB lets go of the 1.20 floor or peg? Some pundits have been discussing the recent strength of the Swiss franc as a result of the upcoming Swiss referendum on GOLD, but I am skeptical of that view. Today, Reuters published an article titled, “Everyone Loves the Swiss Franc So Much It’s A problem For Switzerland.” The story cites bankers and politicians who maintain that the SNB policy has been a great success as it has kept the Swiss steady and has not resulted in rampant inflation feared by critics but has prevented an overly strong FRANC from leading to deflation.

These arguments do not make the program a success for if the SNB‘s efforts were a success the EUR/CHF wouldn’t be trading just above the floor. The SNB has printed massive amounts of FRANCS and bought a vast portfolio of European sovereign debt and other foreign currency based assets, from bonds to equities. The SNB even purchases U.S. small cap stocks as it diversifies from holding EURO assets–just 45 percent of the SNB balance sheet is EURO-based. If the SNB decides to abandon its present policy it will be problematic for European sovereign debt as a large buyer will leave the market, putting more pressure on the ECB.

Also, if the SNB changes course other global investors may become very concerned about the European debt markets and begin dumping the debt of the peripheral countries sparking a renewed European crisis. The EUR/CHF cross is an important barometer of investor psychology and it is the Swiss national policy that has made it so. If the SNB wishes to maintain its present policy even as the markets reapply buying pressure to the Swiss franc on a relative basis what will the bank do? My first guess is to dramatically cut its short-term interest rates.

The Reuters article raises that very issue but cites concerns about negative rates fueling “Switzerland’s real estate boom.” The Swiss cannot have it all ways and its decision stands to have a major impact on the world financial system. The question remains: WHO IS BUYING THE SWISS FRANC IN DIRECT CONTRAVENTION OF SWISS NATIONAL POLICY,  ESPECIALLY WHEN THE SNB HAS AN UNLIMITED CHECKBOOK? The Swiss franc rises in direct defiance of its guardians. Ah, the dilemmas of the central banks.

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3 Responses to “Notes From Underground: Another G-20 Communique … Yada, Yada, Yada”

  1. asherz Says:

    Trying to maintain a level of a currency when the fundamentals are and remain against the CB is a fools errand. The markets ultimately are bigger than all the resources it can throw at it, be it the SNB or the BOE (1992). Selling the EURO and buyhing the SWISS has to be a winning trade “eventually.” Traders think about today or tomorrow. Long term investors focus on the fundamentals even when facing an SNB with an “unlimited checkbook”. Even CB have limits, financial or rational.There comes a point when the towel is thrown in. And “eventually” in the EUR/CHF is probably not that far away to make the trade silly.

  2. Alex Says:

    Currency pegs are there to be broken. The boys will attack the 1.2000 level when they’re ready and with the higher vol coming into the FX arena that time might be sooner rather than later.

  3. yra Says:

    Alex–absolutely because markets are like water–seeks its weakest point to attack—the question for us is where will the fallout be greatest and how will it effect global markets

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