Two nations have the odd combination of near zero interest rates and extremely strong currencies: Japan and Switzerland. Japan has finally moved once again to try weakening its popular currency (click here for a description I gave on how to play the intervention). The Swiss National Bank (SNB), burned by a very unsuccessful attempt to weaken its currency against the euro from 2009-2010, announced it will lower interest rates by tightening the three-month Libor from 0-0.75% to 0-0.25%. The SNB’s warning about its weakening economy could not be any clearer:
“The Swiss National Bank (SNB) considers the Swiss franc to be massively overvalued at present. This current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland. The SNB will not tolerate a continual tightening of monetary conditions and is therefore taking measures against the strong Swiss franc…
…Since the SNB’s last quarterly monetary policy assessment, the global economic outlook has worsened. At the same time the appreciation of the Swiss franc has accelerated sharply during the last few weeks. Consequently, the outlook for the Swiss economy has deteriorated substantially.”
This statement is quite a turnaround from a March monetary policy statement in which the SNB concluded that a higher inflation forecast for 2013 meant that expansionary monetary policy must soon come to an end. At that time, the SNB noted that overall economic activity remained resilient in the face of the franc’s strength although tourism and exports were getting pinched. Now, the SNB is using a heavy dose of jawboning to convince buyers that the currency should no longer serve as the “safe haven” traders believe it to be.
The Swiss franc responded by weakening for about three hours before stalling, regaining most of its lost strength, and then resuming its weakness. With the franc up 10% versus the euro in just one month, 13% year-to-date, and a whopping 26% since the beginning of 2010, it is not clear that traders will heed the SNB’s warning. The current trend comes with strong momentum, and traders will no doubt test the SNB’s resolve to do anything more substantial to stop the speeding train.
Reuters posted an article featuring numerous quotes from various analysts and economists regarding the SNB’s surprise decision. The main summary is that while the SNB’s move is long overdue, the SNB may also be quite powerless to arrest the strength in its currency until the debt worries in the eurozone disappear.
Weak economic numbers may also finally cool enthusiasm for the franc. If the economy’s prospects are even half as poor as the SNB seems to suggest, I have to assume that the franc’s ascent is indeed coming to an end soon. However, with the Japanese actively working to weaken the yen, with the Federal Reserve uninterested in supporting the U.S. dollar, and with a worsening global outlook, where are currency mavens going to turn for relative “safety”? Global central banks are sure to meet weakening economic conditions with looser monetary policies that will reignite competitive devaluations. Got gold?
Be careful out there!
Full disclosure: net short Swiss franc; long GLD, GG