[...]Switzerland Introduces Quantitative Easing | afoe | A Fistful of Euros | European Opinion[...]…

[...]Switzerland Introduces Quantitative Easing | afoe | A Fistful of Euros | European Opinion[...]…

[...]Switzerland Introduces Quantitative Easing | afoe | A Fistful of Euros | European Opinion[...]…

[...]Switzerland Introduces Quantitative Easing | afoe | A Fistful of Euros | European Opinion[...]…

Switzerland Introduces Quantitative Easing | afoe | A Fistful of Euros | European Opinion…

Basically, what seems to have happened is that a lot of short position holders closed their positions due to the uncertainty on Thursday, and then reopened them on Friday, as could have been anticipated.

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Hungary’s forint was at its three-week firmest to the euro at 293 in morning trade on Friday, but – as a correction of yesterday’s sharp firming – it started to ease markedly. Amidst a relatively positive global investor mood the HUF managed to stay just below 300.

Poland’s zloty and the Czech koruna have mimicked the forint’s moves against the euro today and on Thursday, albeit their swings were not as heavy as at the HUF.

EUR/HUF was around 302 on Thursday morning and eased to 309 in afternoon trade only to firm to 294 in the evening. The forint hovered around 293 and 299 in today’s session. Thursday’s sharp appreciation could have knocked out the positions of some punters that aimed to weaken the HUF and today’s easing could be a sign that short positions were reopened. In later afternoon trade the forint was quoted at around 299 vs. the EUR.

“First note that the SNB is only buying Euros and not other currencies, this is explicitly stated in the SNB announcement.”

This is a good point. It also could be seen as a way of helping Austrians, who also (for pre euro historical reasons) have CHF loans, in fact they started the fashion. Indeed, CHF lending (as opposed to euro loans) make little sense in the East where it not for the fact that it was Austrian banks who initiated.

“On the other hand though , a weaker CHF alleviates the pressures on the CEE homeowners that have CHF denominated mortgages.”

Well, this is certainly a way to “market” the policy, and this is what they have done, for all they are worth.

In fact, outside Hungary and (too a much lesser extent Poland and Croatia – the main banks which went up today seem to have been Poland’s BRE and Hungary’s OTP) the presence of CHF lonas is not that important – big worries inside the eurozone at the moment in terms of Fx exposure (apart from Hungary) are Romania, Bulgaria and the Baltics, and lending there is all in Euros. The Bank for Inetrnational Settlements in a study in 2007 found “little evidence in the cross-border data of unusual borrowing in Swiss francs that might correspond to Swiss franc-denominated retail lending”, although they did make an exception in the cases of Hungary and Croatia, where they noted that lending in Swiss francs to retail clients reached over 10% (and of course in the Hungarian case well over 10%) of the total retail loans in those countries. Indeed swiss franc loans now seem to account for over 80% of all newly generated housing related credit in Hungary. I explore this topic in full on my Hungary blog. The Hungarian government has been actively considering subsidising people crossing over to HUF loans, but the Hungarian in the street seems to be more focused on the short term monthly payments issue (given that NBH benchmark rates are at 9.5%, while CNB just went, as we already know, near to zero).

“The SNB targets the EURCHF rate for obvious reasons ( Euro area trade is huge % of Swiss exports ) but the ECB does not care that much since Swiss trade is less than 5% of the Euro area trade, so not a huge knock.”

But the main point I would make is that what I’m focusing on here is the devaluation as an anti deflation weapon, rather than competitive export oriented devaluations. What they want to do is lower the value of their currency to increase the price of imports, if you like. In this sense it doesn’t really matter which currency you buy, although as I say, it makes it easier to sell if you say you are helping the CEE.

They do couch the intervention in explicitly anti-deflation terms:

“and there is a risk of negative inflation over the next three years. Decisive action is thus called for”

so while here in Europe we not be especially worried by this development at this point (officially Trichet sees no deflation threat, like Nelson, he has the telescope on his blind eye), I doubt what they have just done will be lost on Japan and China, where the pain is really being felt at this point, and where deflation is seen as being a much greater menace, in particular with their recent bad experience with NPLs in the banking sector.

What I am worried about here is the precedent which is being set, and I think what you call “market sentiment” is being excessively eurocentric and complacent at this point. Both China and Japan can print very large quantities of money any time they like. Surely they would also be being very cooperative globally, helping their regional neighbours in S Korea, Taiwan and Spore ramp up exports to Europe and the US, thus alleviating pressure in the region, or is global cooperation merely a European phenomenon?

Fortunately China’s Premier Wen Jiabao is restricting itself at the moment to putting on pressure on the US by “worring” about its holdings of Treasuries and asking for assurances its investments are safe.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

This is obviously the opening gambit in a negotiation, the thing is what does the Chinese administration want in return for holding US Treasuries?

They need relief, just like the East of Europe does.

“Market action yesterday validates the above points”

Well look, that was an initial knee jerk. Markets are like that. The forint is already down again today, and action on this level is certainly not going to save Hungary’s bacon. I think the CEE thing is just window dressing, on an action they need to take, after all people have been taking CHF loans because interest rates have been low, and interest rates have been low because of deflationary tendencies in the economy. Switzerland is simply a milder version of Japan on this level.

“So hold the global war worries for another day maybe.”

Agreed, next week or the week after perhaps

But seriously, don’t underestimate where all this can lead, with time, since the pain is real, and all this is not as controlable as some might like to believe it is.