Zak Mir on The Swiss National Bank’s Cloud Cuckoo Land Moment
It may be said that from King Canute onwards we have seen history littered with examples of hubris losing out to forces beyond its control. For the financial markets the best example in recent history was of course the pound been kicked out of the ERM in 1992. This came as a result of an attempt by the Bank of England to prepare the UK currency for entry into what we now know as the euro.
However, currency traders knew that our economy was simply too weak to be involved in the single currency project at that time, and the artificially high level of Sterling was shorted by George Soros and others in what was known as Black Wednesday. He made a $1bn at UK taxpayers’ expense. Ironically, Black Wednesday came less than two years after Mrs Thatcher had suggested that anyone who wanted her to go to Parliament and propose the abolition of the great British pound was living in cloud cuckoo land.
Given that Cuckoo clocks are traditionally one of Switzerland’s exports there is an element of poetic justice in its ridiculous Euro peg policy at 1.2 francs being abandoned in such an embarrassing fashion this week. Indeed, hundreds of years of credibility in terms of the country being a safe /tax haven have gone out the window in just a few hours, with the SNB appearing to be no more credible than the Bank of Toyland. Of course, the FX markets recently had a big win on the Ruble as the Russian attempted to prop up the collateral damage of acquiring Crimea and parts of Ukraine with 17% interest rates.
Once again, we were shown that when it comes to central banks trying to defend the indefensible, biting the bullet sooner rather than later is very often the best course of action. I would on this basis make no apology for quoting Margaret Thatcher again: “You can’t buck the market,” was her comment when her then Chancellor Nigel Lawson tried to shadow the Deutsche Mark in 1989 (an precursor of the 1992 failure), and this quote remains one of the finest ever regarding the financial markets. This stands in contrast to IMF Chief Christine Lagarde stating that the abandoned peg was, “a bit of a surprise.” Possibly, not a candidate for the Oxford Dictionary of Quotations.
But what of the plight of our wounded friends at the Swiss National Bank? Of course, while financial journalists have been trying to dramatise the events of January 15th, as if this was really required, it may be argued that the best part of the whole affair is yet to come.
Over the next few days and weeks we shall see the Swiss Franc rise to the level it should always have been. Perhaps the spin here is that for over three years Swiss exporters did have an easier time of it than they should have given the artificially low currency?
However, the well flagged move to ECB QE was really the death knell of the 1.20 peg policy. To be fair, until even as recently as last summer conventional wisdom had it that the Germans would always block QE and hence the SNB would be able to afford buying enough Euros to keep the Swiss Franc cheap.
But, if we learn anything from those who artificially try and control the markets, fate tends to intervene with the most unusual events as if to spite them. The only thing more strange than the latest action on the foreign exchanges would be if Switzerland decided to join the Euro in order to save its exporters by giving them a weaker currency. But that could never happen – could it?
Souce: xe.com
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