Notes From Underground

The Swiss referendum on gold purchases, and, more importantly, setting a fixed GOLD/RESERVE RATIO of 20 percent was OVERWHELMINGLY defeated by a Swiss electorate suffering from a lack of oxygen reaching their brains. THE ALPS ARE TOO HIGH! Swiss citizens voted 78%-22% in opposition to the proposed referendum, thus maintaining the present policy of supporting the EUR/CHF floor at 1.20 and continuing the building of massive reserves. Two outcomes tell us that the market was underwhelmed by the vote and that is the EUR/CHF remains at 1.2030 and the GOLD market reversed last night’s early selloff and closed above last Wednesday’s high of 1.201. The EUR/CHF should have been well bid today following upon the Swiss voters supporting the SNB in its endeavors to maintain the Swiss franc at a fixed level versus the troubled euro.

The market’s response tells me that the SNB will be tested and have to buy an enormous amount of foreign assets and/or dramatically cut interest rates to a more punishing negative yield. The SNB put out a press release acknowledging its pleasure with the referendum outcome. It also promised “the SNB will continue to enforce the minimum exchange rate with the utmost determination and is PREPARED TO BUY FOREIGN CURRENCY IN UNLIMITED QUANTITIES TO THIS END. THE SNB WILL TAKE FURTHER MEASURES IMMEDIATELY IF REQUIRED” (emphasis mine). The SNB will rue the day that this vote failed for it could have provided a convenient out from an ill-conceived policy. As Dennis Gartman likes to say: “Be careful what you wish for as you may get it good and hard.”

***The view on crude oil and how it reflects how the central banks have so badly screwed up the global financial system. In days of yore, a precipitous drop in the price of crude oil would have been deemed an economic positive for Japan as it imports nearly all of its fossil fuel needs. In response, the YEN would have rallied and all Japanese asset classes would have benefited. In today’s world of central bank central planning, a fall in energy prices is seen as having a deflationary impact and thus the BOJ will have to become even more aggressive in adding liquidity to the market pushing the YEN lower.

This deflation scenario being played out through algorithmic correlations will break down at some point as the BOJ ponders the possible stimulus provided by a thirty percent drop in energy prices. I advise my readers to pay attention to the CRUDE/YEN chart for it was that relationship that supposedly keyed Governor Kuroda pushing for another round of increased QE. Today, the CRUDE/YEN touched its lowest levels in two years. Is it a wage increase for the average Japanese or more downward pressure on prices? If it represents a rise in real wages then the BOJ should be patient in acting to increase QE for remember the Oct. 31 vote was 5-4.

***This Thursday the European Central Bank announces its rate decisions and the market has a built in bias for President  Draghi to put forth a genuine QE program that will lift the ECB‘s balance sheet by a minimum of a trillion euros. The drop in OIL may be providing some hesitation by the Germans in supporting an outright QE program. Bundesbank President Jens Weidmann stated on Friday that the dramatic fall in OIL PRICES may be a stimulus and the ECB should be patient in its efforts to increase liquidity via QE. ECB Executive Board Member Sabine Lautenschlaeger raised further opposition to QE. In a Reuters article on November 29 Lautenschlaeger said she “… saw little room for further easing of monetary policy despite a further fall in euro zone inflation.” The ECB member should be listened to as she was a member of the Bundesbank and is also a respected German jurist.

In closing she said: “For me, given the current situation, the hurdles for further measures are very high especially for broad purchase programs.” This is important to note because the MARKET IS VERY SHORT EUROS IN ANTICIPATION OF PRESIDENT DRAGHI PROPOSING AN ACTUAL QE PROGRAM OF SUBSTANCE. IF THE ECB PUSHES OFF QE THE EURO MAY SEE SHORT COVERING. I will be keeping my powder dry as many markets will suffer from an ECB failure to provide. More importantly, the French and Italians will be very disappointed with a rally in the EURO. The DAX has outpaced the SPOOS during the last two weeks so be aware of any weakening in the DAX if the market gets jittery about any reticence from the ECB on QE.

Tags: BOJ, ECB, EUR/CHF, Gold, Mario Draghi, QE, SNB, Swiss Franc, Yen

This entry was posted on December 1, 2014 at 9:22 pm and is filed under BoJ, Currency, ECB, 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.