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 (htStefanKarlsson) tells 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.

Swiss National Bank Appears to Have Intervened in Currency Markets

The panic flight out of the euro has seen a panic flight into the Swiss franc.

A panic flight into the franc means that prices of European goods drop dramatically for the Swiss. It's like a huge global discount sale exclusively for the Swiss, because of their strong currency. However, thanks to ancient mercantilist thinking which sees a strong currency as bad, it appears the Swiss National Bank has intervened and driven down the value of the franc by printing more of them and spoiling the big discount for the average Swiss resident.

In recent days, there were two massive euro buying programs with the buyer using Swiss francs. This smells a lot like central bank activity. It drove the franc down substantially. 

And then we have this from the president of the Swiss National Bank, Phillip Hillebrand, when he was interviewed by the Neue Zuricher Zeitung, May 8, 2010:

We will not allow that the euro zone problems and an excessive rise in the franc to lead to deflation in Switzerland. That defines our policy with regards to the exchange rate. The bank will act in a decisive manner if needed

Fed Quadruples Dollar Availability To Foreign Central Banks

The international re-inflation has begun.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion to $247 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Following the announcement the cost of borrowing in dollars overnight dropped to 3.84 percent from 5.03 percent yesterday.

Under the new arrangements, the ECB doubled its limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.

The ECB said it would offer $40 billion ``for as long as needed'' in overnight funds to the region's banks. It will also increase by $5 billion the amount it lends for 28 days and 84 days to $25 billion and $15 billion. The Swiss National Bank will boost its 28-day auctions to $8 billion and the 84-day offering to $9 billion. Both were previously $6 billion.

The Bank of Canada said it has decided not to draw on its $10 billion swap facility at this time. The Bank of Japan, whose policy board held an emergency meeting today, said it will use its $60 billion as required by market conditions.

In auctions of their own currencies, the ECB today lent 25 billion euros in one-day money and the Bank of England 66.2 billion pounds in one-week loans.

-EPJ Newsdesk

Central Banks Add Liquidity Overnight, But Fail To Push Rates to Targets

Huge money injections were made overnight, but they still weren't large enough to push rates completely back to various central banks' target rates. Not a good sign

The European Central Bank injected €70 billion ($100.17 billion) in one-day funds into euro-zone money markets, more than double its Monday injection of €30 billion. The Bank of England offered £20 billion ($36.05 billion) in extra two-day funds, atop Monday's £5 billion in extra three-day funds. None of this pushed the rates to target.

The Swiss National Bank also made extra overnight funds available, but a spokesperson declined to say how much. The Bank of Japan injected ¥2.5 trillion ($23.84 billion) into Japanese money markets in two separate operations.

The interest rates on loans euro-zone banks make to one another overnight increased again Tuesday, rising to a high of 4.61%, well above the ECB's policy rate of 4.25%. After the ECB announced it would renew its overnight fund injection, rates fell to 4.43%, still above the bank's target. The ECB prefers to keep the difference between the inter-bank lending rate and its own short-term target to a few hundredths of a percentage point.

The Bank of England's injection brought the cost of borrowing overnight cash down from 8% to 6%. But this is still a full percentage point above the U.K. base rate.

-Robert Wenzel