Tuesday, September 6, 2011

The Swiss capitulate


This morning the Swiss central bank announced that it will no longer tolerate a continued strengthening of the franc vis a vis the euro, placing a floor of 1.20 on the euro-franc exchange rate. The chart above shows the history of this rate, with the euro now having lost almost 30% of its value against the franc since late 2007.


This next chart shows the value of the dollar vis a vis the yen, with the dollar having lost about 40% of its value against the yen since 2007. Like the Swiss franc, the yen has appreciated so much in recent years that it is probably running out of room on the upside. Commodity currencies like the Canadian dollar and the Aussie dollar have also enjoyed tremendous appreciation, but further upside seems limited. That means that disaffected owners of the euro are essentially limited to the dollar if they want to opt out of the euro. Not surprisingly, the dollar has jumped 3% in the past few days, and is up over 1.5% today on the franc news. In this manner, the bad news coming out of Europe is good news for the dollar.

9 comments:

seekingtraceevidence said...

What about the effect of HFs shorting US$ to gain leverage at low, low cost? This makes sense to me especially with the high levels of volatility and market vs currency moves.

j said...

Scott, quick question, I own shares of Nestle (NSRGY),the ADRs are down over 7% today which is the largest daily move that I can recall. I assume it's because of the SF being tied to the euro. Currencies are not my forte, wondering why this SF/Euro link is seen as so negative. Thx.

Scott Grannis said...

Euro Stoxx 50 is down over 6% since Friday, so this explains most of today's move in NSRGY. The Swiss decision actually ended up strengthening the euro vs the franc a bit. The market's biggest concern is the outlook for the euro economy.

Bill Lucken said...

any thoughts on this blog suggesting that the SNB move is very reckless and harmful?
http://brucekrasting.blogspot.com/2011/09/on-swiss-move.html

Benjamin said...

I recommend that Scott Grannis read any of several excellent conservative bloggers re the Swiss, such as Hawtryblog, Scott Sumner, or David Beckworth.

Scott Grannis said...

The SNB may live to regret its decision, particularly if the euro weakens significantly against other currencies. But otherwise there is little reason to doubt whether they can effectively limit the franc's appreciation vis a vis the euro, unless of course they try to sterilize their intervention. Unsterilized intervention (buying euros and creating francs in the process) is a sure-fire way to keep the franc from appreciating.

John said...

Europe is an economic powerhouse. We shall see. As a whole, they're more willing to pay their bills than the is the Tea Party constrained U.S.

Frozen in the North said...

Scott are you going to take odds on how long the Swiss pegging will remain in place? My guess is that there are one or two "Soros" in the wing looking forward to showing the Swiss that they cannot control things.

Moreover, its madness for the swiss to get in bed with the Euro! Especially now

John said...

Medium to long term, those betting against the Euro are going to lose.