by George Dorgan
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Questions to George Dorgan
Is there any chance that the SNB or other central banks could follow the BOJ and just depreciate the currency?
George Dorgan: What did the BoJ do? Monetary easing and talk down the yen in a mercantilist style.
A central bank is able to talk down a currency only if there is deflation and risk-appetite is high; this was the case for Switzerland and Japan until some weeks ago. A second condition is that immigration is low. Immigration to Japan is weak but not to Switzerland and Australia: Swiss employment rose by 2% last quarter thanks to immigration. A third condition is that there is no real estate bubble; both Switzerland and Australia have a bubble, while Japanese home prices are rising now.
On the other hand, you can talk down a risk-on currency in phases of weak risk-appetite and bad economic data. This is currently the case for Australia and New Zealand.
Part of our New Normal could be that higher immigration into Japan could start one day, while Zerohedge emphasizes that Japan will go bust.
Could the SNB simply ignore inflation – if only to shake confidence of inflows and to restart outflows?
Inflation means that there is more demand than supply for goods and services. Inflation will reoccur when the Swiss and the global economy grow somewhat stronger again. As the recent +0.6% GDP shows, the Swiss economy has already started to recover, just the world economy is lagging. Details of the Q1 GDP shows that firms are building up inventories for future demand.
There is still an issue concerning demand from China and Europe, but there is NO problem as far demand from Switzerland: Swiss consumers are spending.
If a recovery occurs and inflation rises close to European levels and the ECB-SNB rate differential still exists, then markets might prefer the euro against CHF. Markets want currencies with high rates, GDP growth and low inflation. Hence, it is not the SNB but markets that drive the EUR/CHF higher. The low SNB rates are just facilitators for a rising EUR/CHF and certainly for a rising Swiss real estate bubble.
Should Swiss inflation rise to levels around 1%, the IMF, the OECD and the US Treasury will tell the SNB to remove the floor; and, the bank will comply. Even more importantly, the Swiss central bank law will oblige the SNB not to tolerate inflation.
Tags: Japan,New Normal,Swiss National Bank,Swiss real estate
2 comments
trader
2013-06-06 at 12:58 (UTC 2) Link to this comment
It was not until later that I realized that some of QA`s were actually a response to my last article comment, thank u very much Mr. Dorgan for taking your time explaining them. And great work, I certainly find your blog much more realistic and professional than ZH and others.
PS(thanks to you I closed my eur/chf position back then at near top of 1.2450 on that first swing up – only to see it collapse back 300+ pips ;))
It will certainly be interesting to see what SNB will do, law may hold them to depreciate currency much, but as long as there is euro with its current cheap value to germany it posses very big problem for swiss companies. Even though luxury firms will always have a good business(adding to overall trading balance index), local food and common products companies will IMO have serious competition problem especially to germany if floor was to be canceled(not to mention possible market reaction). I just cant imagine it happen.
Also, note that it is certainly also thanks to the floor that market can drive eur/chf rate even higher – there is not much to lose as everyone know the limit, even allowing SNB to offload some of reserves to the market while scaring at least some of inflows by giving them signal that chf can only go down from here.
Although in case of Japan it may have been “talk down” and “market expectations”(although from price action look on the chart I do sense strong initial BOJ hand at the bottom of near 75) that drove yen lower, it was purely SNB action back then that spiked pair 1k pips in ~15min back then…
What I personally suspect that may happen is that floor will breach “unexpectedly” at some point to shake longs, with new eur/chf uptrend followed after that. From price action perspective if u look at weekly it would create double bottom which would make sense.
best regards and thanks again ^_`
DorganG
2013-06-06 at 13:03 (UTC 2) Link to this comment
It will be the SNB that removes the floor, implying that they a need a stronger franc to fight against inflation and the real estate bubble. We are not there yet, it will 3-5 years.
More in the second part of the questionnaire.