Although the extent to which the surprise move by the Swiss National Bank last week has damaged financial institutions will not be apparent until the end of the month, it is already clear that enormous damage has been wreaked on many businesses exposed to the foreign exchange markets.
On Thursday the SNB unpegged its currency from the euro without warning. The peg was put in place three years ago during the height of the euro crisis to prevent the Swiss franc from rising too much relative to its EU neighbours and damaging its exports.
Swiss Franc images by MadGeographer
The shock move caused the Swiss franc to rally almost 30% against the euro and 28% against the dollar. To maintain the peg, the SNB had been forced to accumulate around €500 billion leaving it very vulnerable to a euro devaluation.
It would seem that the move was not coordinated with the ECB or the Fed and may be endemic of a new low phase in global central bank communications. Many times throughout the financial crisis central banks have coordinated efforts to stabilise market volatility and to manage stimulus programs in concert.
The SNB shock announcement seems to have happened in isolation and could mark the start of a far less accommodative stance by national central banks. This is not surprising as with a strong dollar, the U.S. is able to reduce the costs to foreign markets of its goods and services, thereby producing a massive competitive advantage. Now that the euro is going to start debasing itself too, it is natural that the Swiss also abandon a peg which is about to become indefensible. The question “Who next?” will break ranks. Currency wars and related volatility are now in full swing.
According to Bloomberg, Citigroup, the largest currency dealer globally, lost around $150 million on the move. Deutsche bank also lost $150 million and Barclays are reported to have incurred losses of €100 million.
Some funds and FX brokers and their customers were severely hit with funds closing and other businesses going under or getting bailed out by larger institutions.
Marko Dimitrijevic, chief investment officer and founder of Everest Capital LLC – (Bloomberg)
Everest Capital had to close it’s Global Fund.
“Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about $830 million in assets at the end of the year, after losing virtually all its money on the SNB’s decision, a person familiar with the firm said last week.”
Other companies have failed completely such as Alpari in the UK and Global Brokers NZ in New Zealand.
Banks in Croatia and Poland may yet feel the pinch as many of the mortgages taken out by house-buyers were in Swiss francs. This was done to avail of low interest rates but now many homeowners will find themselves in negative equity.
The Croatian government is considering pegging it’s kuna to the Swiss franc for one year to give borrowers time to adjust. Poland’s deputy prime minister, Janusz Piechocinski, has suggested that Poland will support borrowers caught in the maelstrom if the Swiss franc remains above the 4-zloty level for an extended period.
So far there have been no reports of national governments being exposed to the move as happened when Brazil and Mexico’s treasuries had shorted the dollar before its rally.
The unsignaled move by the SNB suggests an acceleration of the currency wars. Many analysts expect similar moves from other central banks who have been maintaining a peg with the euro or dollar. As central banks increasingly act unilaterally and defensively it may be that confidence in the central banks themselves will be eroded.
Dr. Marc Faber of the Gloom, Boom and Doom Report believes that such an environment will be conducive to owning gold. At a Societe Generale presentation in London last week he said,
“I’m positive gold will go up substantially [in 2015] — say 30%.” He continued, “My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens — I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum,” he said. “That’s the only way. That’s something I will do.”
Dr. Faber is always very measured in his forecasts. Investors the US and around the world would be wise to take note of his suggestion by holding gold in fully allocated, fully segregated accounts in fully audited vaults in the safest jurisdictions in the world.
Dr. Faber’s webinar at GoldCore: Gold and Silver Allocation in an Uncertain World
Goldcore Insight on Currency Wars: Bye Bye Petrodollar Buy Buy Gold
MARKET UPDATE
Today’s AM fix was USD 1,292.25, EUR 1,113.63 and GBP 852.35 per ounce.
Yesterday’s AM fix was USD 1,275.50, EUR 1,099.85 and GBP 841.41 per ounce.
Yesterday’s PM fix was USD 1,273.75, EUR 1,096.07 and GBP 839.87 per ounce. The U.S. markets were closed for a national holiday on Monday.
Gold advanced to its highest in nearly five months as precious metals climbed on safe haven demand amidst concern about sluggish global economic growth.
The International Monetary Fund cut its global growth forecast the most in three years in a note yesterday from Washington. It said slowing growth almost everywhere except the U.S. will more than offset the boost to expansion from the slump in oil prices.
The IMF noted the world economy will grow 3.5 percent in 2015, down from the 3.8 percent rate projected in October. It also revised downward its estimate for growth next year to 3.7 percent, versus 4 percent in October.
Bullion soared last week by the most since August 2013, after the Swiss National Bank ended the franc’s peg to the euro and deepened negative interest rates, causing chaos in markets. The European Central Bank may announce asset purchases on Jan. 22 before a Greek election on Sunday that has increased concern that they may leave the euro.
Spot gold climbed 1.5 percent to $1,294.26 an ounce, the highest since Aug. 28, and was at $1,292.44 early in London. Comex gold bullion for February delivery climbed 1.2 percent to $1,292.50.
Silver rose as much as 1.9 percent to $18.028 an ounce in London, the highest since Sept. 19. Palladium gained 1.1 percent to $766.90 an ounce and platinum added 0.2 percent to $1,268.50 an ounce, after reaching its highest price since Oct. 29.
At a troika conference in Dublin yesterday, Irish Finance Minister Michael Noonan stirred up the pot ahead of Draghi’s ECB meeting in Frankfort, when he said that having national central banks buy government bonds would be “ineffective”.
Mr Noonan’s remarks received a cold response from ECB executive board member Benoît Cœuré, who was sitting next to him on the same panel. However Noonan’s idea was in line with IMF chief, Christine Lagarde, who also attended the conference about Ireland’s bailout. She said, “The more efficient it is, the more mutualisation, the better”.
Lagarde admitted that Ireland had been a “learning curve” as the troika has received renewed criticism of the ECB’s refusal to allow the Irish authorities impose losses on senior bank bondholders.
