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: Axel Merk,Bob Savage,Charles Dumas,Euromoney,Japan,New Normal,Old Normal,Swiss National Bank,Swiss real estate