Extending a Helping Hand to the East?
Update: Well, to think that the SNB's nudge towards QE would have a "lasting impact" on the market's view on the condition in the CEE was perhaps a bit too optimistic. At least, it seems so and thus I reiterate Nigel Rendell's comments, (Nigel is senior emerging-market currency strategist at RBC Capital Markets in London).
“There has been a nice extended rally and now investors and traders are taking money off the table,” said Nigel Rendell, senior emerging-market currency strategist at RBC Capital Markets in London. “It’s a matter of playing ranges and reacting to any news that affects global equities.”
Sitting here on a murky, but decidedly mild, Sunday afternoon in Copenhagen thinking about last week's events one of the more interesting was surely the Swiss central bank's decision to effectively enter quantitative easing as short term interest rates hit 0.25%. The reasons for this move are not in themselves extraordinary. On the basis of a GDP forecast of the coming year standing at a -2.5 to -3.0% contraction as well as the the severe risk (and in effect actual forecast) of deflation over the the forecast horizon monetary policy is acting accordingly. However, what was more interesting was the remarks that the unduly appreciation  of the Swissie since the advent of the credit crisis represented "an inappropriate tightening of monetary conditions";
The value of the Swiss franc has increased substantially since the beginning of the financial crisis in August 2007. This currency development has gained momentum since the National Bank's last assessment in December. Under the present circumstances, this represents an inappropriate tightening of monetary conditions. In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro.
Especially noteworthy was of course the point that the SNB will be conducting open market purchases in the spot market to halt the Swissie's ascend versus the Euro. As is visible from the graph below (inspired by Macro Man's visualization), EUR/CHF reacted swiftly (click image for better viewing).
Now, the SNB's move has already been parsed by the media and some of the blogsphere's best analysts; Macro Man (see link above), Edward Hugh who posted almost simultaneously with Peter O'Neill over at AFOE, as well as Stefan Karlsson. One strengthening, narrative that is emerging is the talk about a wave of competitive devaluation which would not of course help any of the individual economies in a context of "everyone" doing it. On the other hand the Swiss might arguably have a stronger case here in this respect since it is well known that in relation to hightened risk aversion the CHF is known to appreciate significantly in line with the notion of unwinding of carry trades; see . On a more general note and if the central bank is really pencilling in the kind of deflation suggested by the small snippet released in the context of the decision, it seems a prudent move to also include the currency in the overall strategy even if of course the practical deployment of currency weakening may be easier said than done. Ultimately though, the move seems to be an attempt by the SNB to wriggle the CHF out of the role (perceived or actual) of funding currency in carry trades with the subsequent safe haven flows and position unwinding to follow when markets tank.
“The effect of our interest rate cuts was neutralized by the permanent appreciation of the Swiss franc,” SNB President Jean-Pierre Roth said in an interview with SF Swiss television following today’s decision. “We decided to block a further appreciation of the Swiss franc vis-a-vis the euro. These measures are necessary for our rate cuts to have effect.”
An entirely different effect from this is the potential positive externality this may provide in relation to Eastern Europe's struggling economies and all those households who have taken out consumer credit loans and mortgages in low interest rate Swiss francs during the boom. This narrative was picked up by both Macro Man and Stefan Karlsson and is an important one to keep in my mind when the residual effects of a SNB in QE are analyzed. In Hungary who is the CE economy most exposed to translation risk from an appreciating CHF we recently had news that the government might use some of the IMF funds to help convert CHF denominated loans into Forint loans. Now, before we get too excited it is important to note that the SNB did not say anything about the CHF/HUF and what is more; most of the floating currencies in the CEE have been axed relative to the Euro. Yet, these points notwithstanding, easier access to Swiss francs in a general context mean that the sting might just be taken off of those nervous sentiments concerning translation risk in the CEE.
Sure enough, the initial reactions from CEE markets have been positive and almost cheerful. Consequently, a host of banks, particularly in Poland and Hungary, saw their share prices rise smartly on the news as it, at least for a while, eased the risk that the translation risk on the majority of their loans (assets) would force them into default. Also, both the Zlothy and the Forint clawed back some of their recent lost ground on the SNB's decision.
A Lasting Impact
Surely, the SNB's move represents somewhat of a sea change in the context of the CHF. Traditionally and in this current market environment, there is no guarantee that QE necessarily will lead to a significant depreciation of your currency. The argument here would one of relative debasement and if everybody conducts their own homegrown version of QE, then the result may well be status quo or at least depend on a host of other factors than the pure quantitative effect of the policy. One of these factors in this respect is clearly the commitment by the SNB to intervene when and where ever the CHF is deemed to be to high relative to the Euro (are we getting a target here?) and according to the currency wonks at Dailyfx the bearish theme for the CHF is set to linger. Personally, I am a bit skeptical here and much will depend on the famous credibility of the SNB's commitment and thus by derivative the market's appetite to test this very same commitment.
As for the mitigating effects on the CEE, the impact is likely to be limited in terms of concrete economic impact in the context of pass through effects. However, it may represent a signal and a glimmer of light which could prompt action on how to deal with the translation risk in a proper manner. What is more, it should not only be in Eastern Europe that that bankers are breathing a little lighter. Surely then, the Austrian banking sector heads will be sending a couple of bottles of their finest Öbstler to the governor of the SNB and if I was the head of Unicredit I would be dispatching a vintage bottle of Grappa. In conclusion, it is difficult to see just what the actual impact will be here, but it does represent a rare extension of a helping hand to Eastern Europe even if it was not, initially, meant as one.
 Remember one of the underlying arguments here.