Make no mistake about it, we’re now five years into a global currency war that saw its bloodiest battle to date last Thursday, after the Swiss National Bank (SNB) removed the EUR/CHF floor at 1.20. On countless occasions since 2011, SNB President Thomas Jordon vowed to defend the floor “with utmost determination,” saying it was essential for the Swiss economy’s future.
The timing of this reversal seemed like it was designed to inflict maximum punishment on market participants. According to CFTC data, speculators held the largest short Swiss Franc (CHF) position since June 2013 – a total of 24,171 contracts. At one point on Thursday morning, each of those contracts had lost $30,000 in value, which was 9x the margin requirement. FX brokers like FXCM, Alpari and Excel Markets were insolvent within hours.
The million dollar question instantly became: why now? Presumably, the SNB got a sneak-peak at the ECB’s much anticipated QE program to be unveiled on Thursday, and decided the floor wasn’t worth the risk. It was certainly a puzzling move that dealt a major blow to the credibility of all central banks. Although, maybe choosing deflation over asset-price inflation was the honorable move.
When currency pairs move more than 1% intraday, it’s noteworthy. EUR/CHF fell 30% in a matter of minutes. History shows that large currency swings cause breakdowns, usually in other asset classes. This decision highlights how central banks are struggling to suppress volatility, which is central to their efforts to generate economic growth.
My attention is shifting to Eastern Europe, where countries like Hungary and Poland have been accumulating CHF debt for several years. In Poland, 14.6% of outstanding loans and 37% of household debt is denominated in CHF. The principle due on those loans increased by roughly 25% last week. I expect the economies of Eastern European will continue to struggle, especially because it looks like Russia-Ukraine is heating up again.
Furthermore, there’s speculation that Germany will interpret the SNB’s decision as further proof of why unorthodox monetary policy is no substitute for economic reform. The market has now priced in a mammoth QE-package from the ECB, and if it fails to meet expectations, things could get really ugly.
The SNB’s move didn’t have much impact on the Cup & Handle Fund. We were stopped out of one position, and the portfolio is back to flat on the year, but we live to fight another day – that’s the important thing. The January Investment Letter was sent out yesterday to subscribers, focusing on a sector with an asymmetric risk profile – if you’d like to start receiving these letters click here. It’s $8.25/month or 7.06 CHF, but a week ago it would have been 8.42 CHF.
Today’s letter will cover several topics, including:
With that, I give you this week's letter:
As always, if you have any questions or comments or just want to vent, please send me an email at email@example.com.
Until next time, tread lightly out there,
Managing Editor – Cup & Handle Macro