“Manipulation on a Grand Scale”
In recent months we introduced you to one of our early warning signals – the Swiss franc.
The importance of this signal is that it can give you a clue as to how nervous – or not – the market is.
For instance, when investors piled into the Swiss franc in late July through early August, it warned you to be cautious about the market.
And when they piled out in mid-August it still warned you to be cautious, but signalled that you could take advantage of the change in sentiment. For example, by selling your stocks on the rally.
For the past two months the Swiss franc has been volatile. From one day to the next, investors can’t know for sure whether they should be bullish or bearish.
So, in August the Swiss franc soared in value against the risky Aussie dollar as the market hit bottom. And then it lost value as markets calmed.
Then last night, this happened:
After gaining against the Aussie for the past week – from CHF0.87 to CHF0.82 – all heck broke loose in the foreign exchange markets. The Swiss dropped from CHF0.82 to trade at CHF0.90… a 10% move.
What caused this move? Check out this statement from Philipp Hildebrand, chairman of the Governing Board of the Swiss National Bank:
“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below one Swiss franc twenty. The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities.”
In other words, at the stroke of a button, the Swiss National Bank intervened in the currency market to devalue the Swiss franc.
It takes us back to the early 1990s when the U.K. government tried to keep pound sterling in the pre-euro, European Exchange Rate Mechanism (ERM). In short, the pound was allowed to trade within a range against other currencies…
It worked for a while (just), but eventually no amount of manipulation could stop the pound falling out of the ERM. Of course, George Soros’s famous punt against the pound didn’t help things either.
The point is the artificial restraint of the pound only masked the real problems. It created more volatility in FX markets and ultimately, when the pound was dumped, it fell 30% in just a few months.
So what can we expect from the SNB’s intervention?
For a start, it means the same as all intervention. It means a distorted market that only serves to deceive investors.
While the currency was free-floating it gave you, and every average Joe or Joanne Investor an insight into what the big market players were up to. But now, the Swiss central bank has effectively blindfolded investors.
Or put another way, yet again central bankers have acted to protect their own interests and harm the interests of ordinary punters.
But if the Swiss or any other banker thinks this is the way to calm markets and help the global economy, they’re sadly mistaken.
As Stuart Thomson, portfolio manager at Ignis Asset Management told Bloomberg News, “We will see a lot more intervention now, we will see manipulation on a grand scale.”
Or as our Slipstream Trader, Murray Dawes said this morning:
“We are now entering the next phase of this crisis where all-out currency wars have begun. A quick survey of past currency intervention shows that it often works in the short term but rarely works in the long term. Traders will have been shaken out of many positions and taken some bruising losses in the last couple of days.”
Boy, have they got that right.
Of course the Swiss aren’t the first to manipulate their currency. They’re simply joining a growing line.
The Japanese are regular money manipulators… Brazil introduced a tax on currency trading last year… And the U.S. Federal Reserve – even though its mandate doesn’t include managing the U.S. dollar – has manipulated the Greenback almost non-stop for the past three years.
But our guess is the Swiss intervention is unlikely to have the effect it hopes for.
On the one hand, sure, the SNB has said it will buy “unlimited quantities” of foreign exchange. That’s another way of saying it will print as many Swiss francs as it likes to weaken the currency.
But on the other, we’re not sure we believe the SNB will devalue its currency so much that it destroys the Swiss franc’s reputation as a haven currency.
The way we see it, the SNB’s intervention creates more, not less, uncertainty. Whereas in the past, the currency markets ebbed and flowed in an orderly fashion, now you’ll get a pressure cooker effect.
You won’t get to see the real value of the Swiss franc until so much pressure has built up that the whole thing explodes.
So our bet is… whether it’s next week, next month or next year… the Swiss franc’s 10% slump will be reversed in equally spectacular fashion.
But rather than the Swiss franc signalling bad news ahead of time, thanks to the meddling central bankers, it will only reveal its secrets when it’s too late to do anything about it.