Thursday, June 10, 2010

Bruce Krasting on Foreign Exchange (FX)

This is reposted word for word, in its entirety (except maybe some photos or visuals Mr. Krasting had) from Bruce Krasting's blog site:  Bruce and I disagree on some things, and I may even mildly disagree with some things here, but basically I think Bruce Krasting's knowledge on foreign exchange (FX) far exceeds mine, and I find his posts on FX informative and insightful.  Bruce was kind enough to give me permission to re-post this from his blog and I highly appreciate that permission, as well as appreciate his insights on FX.
These are only opinions, not investment advice.

FX Comments
Written by: Bruce Krasting, June 8, 2010 on and borrowed here with permission. 

One important development two important articles.

The Swiss National Bank came into the FX market again today after the E/CHF broke another critical milestone of 1.38

Tyler Durden did 
a piece and discussed how quickly the benefits of the intervention evaporated. He pointed to the fact that in less than two hours the E/CHF was below the intervention levels.

JPM wrote 
a report that summed up the critical issues. Their report was very bearish for the E/CHF. Their argument is that the Swiss have now spent 1/3 of GDP in currency intervention and they have accomplished nothing. The conclusion is that the Swiss will be forced to stop and let the Euro to float to a much lower level.

Some thoughts on this.

-I wrote recently that I thought we were near to “the edge” of what might be a major hiccup. We are there now. The status quo has to change. We can’t have the SNB be the only force that is holding a market together. They simply can’t absorb the daily supply. Either other Central Banks step into the market in a visible and committed fashion or there is going to be an FX explosion.

-The Swiss have failed miserably. The long-standing rules of this road say you do not fight when you cannot win. They spent their chips defending levels that proved unsustainable. Now they have too small a pile of chips left. They simply can’t double up any longer. The implications on money supply are already troubling.

-As T. Durden points out the sharks smell blood. What is the smartest way to make money lately? Sell the E/CHF when the SNB comes in and bids the cross up 1%. This trade has proved to be a money machine for those that play. That will not stop. It will bring in more money every time the trade succeeds.

The measure of successful currency intervention is whether the intervention results in the re-establishment of two-way risk. Speculators must be made fearful. They must feel some pain. The Swiss have accomplished precisely the opposite. Hot FX money is now emboldened. They have been making a killing at the expense of the SNB. They have a pile of chips in front of them and are looking to ‘make the year’.

-Possibly SNB head Hildebrand is in over his head. He is very popular in Switzerland. He was an Olympic swimmer. An alpine Mike Phelps type of hero. Here’s his bio. I’m sure he is a great guy, but a few years of experience would be helpful if you wanted to take on the entire global FX market.

In his youth Hildebrand worked as a bellhop at a hotel in Davos, Switzerland, where he met many leading European bankers. He attended the University of Toronto, Oxford University, and the Graduate Institute of International Studies in Geneva. Hildebrand was a member of the Swiss national swimming team and reportedly almost qualified for the 1984 Olympic Games. According to, Hildebrand was the "youngest ever governing board member when he joined the SNB in 2003.

With effect from 1 January 2010, the Federal Council appointed him to the positions of Chairman of the Governing Board and Head of Department I of the Swiss National Bank.


-I have done a fair bit of wondering of late if the ECB is not using the SNB as an intervention beard. CB’s intervene on behalf of other CB’s on a regular basis. So it would not be without precedent. But it would be bizarre if true. The magnitude is too large. There would have to be public disclosure if the SNB had an E50 billion sneaky Pete side deal. What causes me to consider this is that I find it incredulous that the SNB is single handedly trying to stabilize/save the financial system.

-I estimate that the SNB had a book loss of CHF2b in just the past few days. That would bring their losses year to date to around CHF8b. About 1,000 Francs per person. This “stealth tax” will not go unnoticed.

-I agree with the SNB when they say that a 1.35 exchange rate would be deflationary. Deflation is being imported to Switzerland via the FX market. That same deflationary force is in the US dollar exchange rate versus the Euro. Question: W
hat does a 10% adjustment in the Euro/$ mean to US GDP? It is not a small number.

-The dollar versus the CHF has been fairly steady at around 1.15. When JPM says the E/CHF is going to 1.25 what they are really saying is that the Euro/Dollar rate is going to ~1.02. A level that many have been calling for. Another of those questions: 
What does a 14% move in the E/$ do to S&P top and bottom line? It is not a small number.

-JPM suggests a put on one-year E/CHF at current levels with a target of 1.25. If you like that bet consider saving some premium expense and forget the one-year horizon. This thing is moving faster than that. Anyway, in a year from now we will be in a dollar crisis and everything will look different.

These are only opinions, not investment advice.

No comments:

Post a Comment

Please Give Your Thoughts