Lessons of 2015 – Pegs Are Not Forever

But do not worry about Hong Kong yet.

Who has been the biggest loser of all in this CHFEUR peg’s unpeg ?

SWITZERLAND !!  of course.

Foreign Reserves

Foreign Reserves 2014


“As of the end of the third quarter, the SNB held 45 percent of its reserves in euros and 29 percent in dollars. The bulk was invested in highly rated government bonds, with 16 percent in equities. ” http://www.bloomberg.com/news/2015-01-07/snb-interventions-boost-currency-reserves-to-record-high-1-.html

The losses are partially offset by the fact that their EUR government bond holdings have substantial gains so far which means they have not lost 20% (loss) of 45% of $478 bio  (i.e. $43 bio). But that is not all, because they lost out in the USD too ! So that would be another 17% (loss) of 29% of $478 bio (i.e. $23.6 bio).

Imagine losing 13.9% of their foreign reserves overnight ?

They must have done their numbers and worked out that, 1. they work for the Swiss people and not Europe and the world and, 2. the losses going ahead will probably exceed their current losses.

The global central banks hold a total of 1.2 trillion EUR in their reserves, Switzerland was roughly 15% of that. It means that the other central banks of the world will be smarting from that move too.

Currency Holdings of Foreign Reserves

Currency Holdings of Foreign Reserves

The implications going ahead.

1. Switzerland will not be buying anymore Euros or European bonds.
2. Switzerland will not be going as much currency defense at all, so forget about the USD and US bonds too.
3. They are going to manage with negative interest rates which means this is a good time to be borrowing and really, it is the way a central bank should operate.
4. Safe haven status preserved and CHF is as good as gold.

While EUR has been at the centre of all this attention, Japan has been lying low. Yet JPY has not been spared the brunt of market moves, being the whipping boy of the market place displaying bizarre and senseless price action which has been absolutely lovely, of course, because we know that Japanese like all things kinky (pardon the pun) and they even have  Kinki fish.

kinki fish

Japanese Yen volatility was just as frenetic as the Euro’s and 1 month vol is at a 15 month high as EUR 1 month vols hit an 18 month high.

jpy intraday

Obama be please, the DXY Index is at a 12 year high as US 10Y treasury yields are at a 18 month low. Safe haven indeed.


This week, we are have the BoJ and ECB lined up, as well as the Greek elections this Sunday, 25 Jan.

Expectations :

1. BoJ to revise inflation target down which means the 2% Mar 2016 inflation target could be out of reach. That leaves room for potentially more easing to come in the months ahead.

Like I said to my friends 2 weeks ago, long USDJPY or short USDJPY, will make money as long as you have the B*lls !

2. ECB is expected to announce that they will be buying sovereign bonds and possibly corporate bonds. It remains unclear how the risks will be shared by the individual central banks of the Eurozone bloc and how the junk (Greece and Cyprus) risk would be apportioned.

The chances of disappointment are high, in my opinion, with so much built into expectations. The Swiss rejection of the EUR has really bought them, the ECB, time because the objective of a weaker currency and lower rates have been achieved even before the first arrow has been fired.

It would pay to trade against the apparent tide this week and what they call the risk reversals.

Good luck !

Key economic events for the week.

WECO 19 JAN 15