The San Francisco Report

1/15. Is the SNB giving up EUR/CHF peg a precursor for worse to come?

The Swiss National Bank (SNB) today announced that it will abandon the peg to the Euro. This is huge. Central banks usually only give in under stress. This is an extreme stress situation. We’ve been thinking about this a lot. There are three interesting aspects to this.

  1. The narrative of the SNB
  2. The reaction of media and markets
  3. The real reason behind this

Let’s start with Number 1. The SNB is saying that the international monetary policy environment is changing. The US is cutting the printing press and the European Central Bank under Draghi is about to start printing. That’s why they think supporting the Euro is not going to work anymore.

This argument is not coherent. First, it misses the point. The US/Euro relationship shouldn’t bother the SNB since the CHF just weakens with the Euro against the USD. Nothing wrong with that. Second, it doesn’t explain, why the SNB thinks that the Euro will keep weakening agains the CHF. Or, to put it bluntly, why does the SNB expect massive selling of Euros against the CHF? The SNB is not telling us the whole story.

Number 2. The reaction of media and market. The media is not really addressing the issue, either. Why is the SNB giving up on the Euro? This has nothing to do with the Dollar or economic policy. According to the SNB they simply don’t think that buying more Euro against CHF makes sense. This issue is not mentioned in the mainstream media.

The markets are also reacting strangely. In our view, the CHF should have strengthened against the Euro by about 20%, (it did 14%). But the Euro should have collapsed against USD by at least as much. Instead Euro is only down 2%. That is nothing. The largest supporter of the Euro outside the Eurozone, the SNB, just said, “genug”. And the Euro only drops 2%. This is not what we expected.

Number 3. Who is selling Euros into the SNB? Something happened in the last few months or maybe weeks which changed the course of international money flows. One big change was the US dollar strengthening, but that can’t be the only reason. The pressure is not on the USD/CHF, it’s on the Euro/CHF. So people are selling EUR against the CHF. Why? Why now and why so much?

Maybe Swatch CEO Nick Hayek has something to day about this. He mentions the Jordan river and compares it to Thomas Jordan, the chairman of the SNB. The relationship is maybe far fetched, but maybe not. Maybe this whole issue goes back to last weeks terror attacks in Paris which made lots of people around Europe uneasy about the political stability of the continent. As the saying goes” Buy real estate when there is blood in the streets”. “And you buy Swiss Francs, before there is blood in streets!”

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