Thursday, June 10, 2010

The Swiss Central Bank Has Gone Mad

The Swiss franc is a very desirable currency right now as Europeans flee (unjustifiably in my opinion and that apparently of Jim Rogers) the euro.

This has caused the Swiss central bank to go on a money printing rampage.

 Marc Chandler (htStefanKarlssontells of the large foreign exchange reserve increases of the Swiss National Bank (Note they have to print huge amounts of money to gain these reserves):

In terms of the euro, the SNB appears to have purchased around 55 bln euros in the month of May. This is simply an incredible amount. Assuming that the SNB is QE is still operative and it is selling Swiss franc and buying foreign–primarily European bonds, consider that the ECB bought around 40.5 bln euros worth of European sovereign bonds in the secondary market. The time frames do not match up perfectly, but it would appear that the SNB bought more European bonds than the ECB itself.
Further, it should be noted that the ECB is sterilizing its purchases. There is no indication that the SNB is doing so.

Karlsson adds:

Another interesting perspective is that, again assuming the numbers are correct, this is nearly twice as high as the value of Swiss GDP during that month (Swiss GDP is roughly €30 billion per month). This is the equivalent of the Chinese central bank buying $750 billion each month, or the Fed buying $2.3 trillion each month.
Got that? Printing money equivalent to twice the countries GDP!!!

What's gotten into the Swiss?

The flight from the euro into the franc (among other currencies and gold) has been pushing the franc up on foreign exchange markets vis a vis the euro. The strong franc hurts the Swiss tourist industry and exporters but is a boom for importers. A strong franc also puts most of  Europe on discount for the Swiss.

But instead of allowing a sort of super discount travel spree and cheap foreign products (Think $50 iPads) for all Swiss that would result from a super strong franc, the SNB has decided to put the franc on the road to severe decline for the benefit of those that cater to the Swiss incoming tourist trade. If the SNB doesn't start sterilizing its insane money practices by draining francs from the system, instead of a super discount on Europe, the Swiss are going to end up with pretty severe domestic inflation (Think $10,000 iPads), and no discounts anywhere.

Admittedly a strong franc does distort the domestic tourist trade but the SNB reaction will be ruinous for the entire country. It is a serious mistake. Shorting the Swiss franc against the euro looks like a solid trade to me.

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