CHF What’s Next?

Read the news today and look at the tape and you would have to conclude that all of the problems in the EU have vanished. Germany’s economy is booming, the Chinese are funding Portugal, Spain sells bonds at a cheap price. What’s not to like?

The currency markets have reacted to all the good news. All the short EURUSD positions got blown up (again) The main bell weather for this is the EURCHF cross. It has backed up three big figures since the start of the year.

I write a fair bit about the CHF. I think it does play a pivotal role in the broader markets. But I rarely trade it. I have seen time and again that this pair (EURCHF) hurts players. The problem is that it is a sucker trade. It is too easy to get short at the wrong time and just as easy to get long and be wrong.

When the news flow turns blackest for the EU you sit back and think, “It’s gotta be right to be short!” But then the news flow turns (one bond auction? give me a break) and it’s all bid no offer.

This too will pass. Europe’s problems are not over. Not by a long shot. There is no “soft landing” scenario. The news will turn negative again in the not too distant future. A month or two at best. With the bearish view still intact one would have to conclude that the EURCHF will be a good short again at some point and new lows are in front of us. Should (when) this occur the Swiss will have a big policy problem on their hands. They survived quite well in 2010, even though the key Euro cross fell by 20%. It’s not possible that we could see an additional significant gain for the Franc in 11’ without it having a major deflationary impact.

With this kind of thinking in mind the influential Neu Zuricher Zeitung came out with a list of things that might be considered to slow down the inevitable rise of the Franc. I thought the list was interesting, so were the conclusions: (excuse my poor German translation)

(I) Peg to the euro
Conclusion: This is a no-go!

By pegging the franc to the euro, it would force the SNB to be completely “addicted” to constant intervention. It would require huge amounts of money to be printed.

(II) Adopt the Euro as the national currency
Conclusion: This is a definite no-go

In the face of undeniable economic differences (from the lower unemployment rate to lower level of debt) Switzerland would not fit in the euro area.

(III) Defending a price band
Conclusion: This won’t work either. The SNB tried it in 2010 and it cost them CHF 30b.

The determination of the SNB in defense of the band would be tested repeatedly until it gives up.

(IV) Negative interest rates
Conclusion: This is a dead end. Tried in the past, didn’t work then. It won’t work now:

It was an act of desperation (when it was implemented in the past), and it would be again today. It would discourage foreign investors, of whom Switzerland is dependent on the long term.

(V) Introduction of the gold standard
Conclusion: Sorry gold bugs, this doesn’t work either:

There is not enough gold in the world to keep pace with world economic growth. A renewed commitment of the currencies of gold would therefore lead to deflation. We no longer live in the twenties or thirties of the last century.

(VI) Taxes and compulsory deposits
Conclusion: Absolutely not! This is the Brazil approach to taxing inward investments. No solution here:

Switzerland lives off the money is invested with us. Switzerland would be catapulted from the circle of reliable financial centers. Even a small tax would be a disastrous signal.

(VII) Regulate foreign exchange market
Conclusion: Not a chance that his would work:

The attempt to develop with a restrictions of trading positions would be doomed to failure.

(VIII) Pray
There is no VIII. There are no other options available for consideration. The seven discussed above clearly don’t work. When the NZZ pans an idea for the SNB you can take it to mean that the SNB is of a like mind.

It’s awful hard to get long EURCHF looking at the NZZ list.

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