What the Swiss Franc Appreciation Means | Hacker News Reader

What the Swiss Franc Appreciation Means

foreignpolicy.com

68 pointskposehn50 comments

# It was expected

I think it was expected from the outset that this would be a temporary peg/floor. There has been recent hints on this.

# It's not a war

Also, this isn't a 'currency war' in anyway. If there is any adjustment that other countries typically dislike it's devaluations, since that'll make their currency relatively more expensive, causing a short-term disadvantage for exporters [whom often line politicians pockets]. This was the opposite, a revaluation (or correction).

Inconsistently people called this a 'currency war' when the floor was introduced too[1].

# Losses

Sure, a few companies were bankrupted because of risky speculation, that happens all the time. It was foolish to believe that this floor would exist indefinitely, and thus any position making that assumption would obviously be very risky.

Interestingly people lost money[2] when the floor was introduced only 3 years ago. Sometimes memory is short.

[1] http://citywire.co.uk/money/have-swiss-won-currency-war-with...

[2] http://www.dailymail.co.uk/news/article-2037632/Kweku-Adobol...

Sorry to disagree, but:

#It's not a war

Yes, yes it is. Has been since the 70's. Anyone who tells you that currency markets aren't a function of State Power doesn't know what CB's do[1][2]. [The public side to this story is that the IMF wasn't informed prior to the move - work out why].

#Losses

Heavily leveraged FOREX companies (aka day babies) were taken to the cleaners, and some banks / funds who had positions lost out. Look at the # of positions that were closed out for the real story.

#Russia

It's interesting to note who holds what in Swiss Banks, and in CHF. Just a thought[3][4]

#HappyCamperFunTimes

Rumor has it that HFTs are going to be heavily ganked very soon, to the tune of 60% through-flow. You didn't hear that here.

[1]http://www.telegraph.co.uk/finance/2773265/Billionaire-who-b... [2]http://www.cfr.org/about/membership/roster.html?letter=S [3]http://www.theguardian.com/world/2010/dec/08/wikileaks-us-ru... [4]http://itar-tass.com/en/economy/769344

> Rumor has it that HFTs are going to be heavily ganked very soon, to the tune of 60% through-flow

Ganked in the "stolen" sense, or in the "outnumbered" sense? Neither makes sense to me. I'm not hearing this here, but .. can you elaborate?

Ganked - as in MMO style:

a) With Legal rules made against a majority of HFT processes (edited - pathways is probably a weird weft for HN)

b) With aggressive >contra algos employed to prevent certain HFT processes working

c) With bandwidth / latency stingrays employed

It's happening as we speak: a lot of players high up in the game are tired of HFTs.

Note: this is all rumor, and plausible deniability has been engaged.

You didn't hear it here, but it's gonna happen.

Again, the downvotes. Ganked means "[i]killed without any ability to stop being killed[/i]"

Aggressive control of HFT in the market is already on the books. Will it save the markets in the next phase?

Nope, but it's on the books. Hilarious that no-one here is connected enough to know this.

Be Seeing You.

Thanks for posting this. It's interesting info. Sorry you're getting downvoted. I'm not really sure why that is.

> control of HFT in the market is already on the books

What are the relevant regulations?

Well for example, there is a proposed transaction tax by some politician in the USA, targeting HFT processes. It wouldn't be painful for joe buying his mutual fund EFTs every month, but it will be for HFTs.

That's not on the books, that's not even in a committee yet, is it?

There are various kinds of HFTs, and some will be ganked, but others are generally indistinguishable from trading that the markets believe are healthy (I'm familiar with more than one "buy-side-only" HFT firms, for example, who would still be profitable through transaction taxes and "order must stay in the market at least 5 seconds" rules which had been contemplated).

Though, I'd be surprised if any law gets passed and enforced against HFT as long as Goldman is HFTing. They have too much klaut to make that happen. Once they stop profiting from HFT - everything goes

Having read Flash Boys it's pretty clear that HFT is just legalized theft. The vested interests can keep it going for a while but it's not viable in the long term.

It's interesting you posted this, then about a day afterwards Luminex was announced [1] [2]. I'm not familiar with the term of art "latency stingray", and it doesn't turn up in a Google, can you please point me to a page about it?

I'm confused about your assertion "a lot of players high up..."; GS is quite high up there, and they're very active in HFT, as are many others, so that seems at odds with your assertion that powerful players are "tired of HFTs" (unless they are playing only to essentially defend their more strategic interests). Any more powerful than them, and I'm thinking executive political participants, but I'm hard-pressed to think of any of them who could actually put something actionable into place would care about HFTs. Unless the volatility induced by HFTs during certain market scenarios is presenting a problematic obstacle for achieving specific nation-state strategic goals, I can't see how national-level political actors would involve themselves with clamping down on HFT activity?

Anyways, fascinating food for thought, thanks for bringing this up.

[1] http://www.marketwatch.com/story/money-managers-led-by-fidel...

[2] Paywalled: http://www.wsj.com/articles/money-managers-led-by-fidelity-c...

My impression is that economists generally thought the Swiss central bank would keep the peg, because why wouldn't they? There's no economic law stopping them and it was obviously good for the Swiss economy.

The fear of central banks with large balance sheets is a powerful political force, one that economists don't really appreciate. The rational thing would be to keep the peg (or even better, target inflation or NGDP) but an unfortunate majority of politicians and voters are fearful of "printing money". Just as central banks around the world keep making the mistake of allowing falls in the inflation rate during a recession, economists keep making the mistake of assuming the next central bank will listen to them.

That's insane.

No-one, and I mean [b]no-one[/b] thought the Peg would be kept.

The issue was how it was broken, nothing more.

http://www.ft.com/cms/s/8084cc9a-9cc5-11e4-971b-00144feabdc0...

http://www.telegraph.co.uk/finance/economics/11353686/QE-or-...

http://www.telegraph.co.uk/finance/economics/11321355/Mario-...

Keeping the peg means buying more and more euros. It's not sustainable.

Exactly.

Europe announcing QE on the scale of the US markets lead directly the CHF moves.

My comment below that showed the media reporting of this is now "down-voted".

>>Out.

Funny. HN - the new Reddit.

It was. The Swiss central bank just had to print francs to sell for euros. It wasn't like the rest of the world didn't want those francs. Remember that this floor was about keeping the franc down.

Clearly markets weren't expecting the change, or else they wouldn't've been so volatile after the announcement.

They were expecting it long run, they just weren't expecting it that day. If you'd asked people last week if the peg would still be in place 10 years from now, most people in the market would have said "no". If you'd asked them if would still be in place 10 days from now, most would have said "yes".

"To put the Swiss franc move in perspective, in the currency cross rates for free-floating major foreign exchange currencies — like the Swiss franc or the U.S. dollar, the euro or the British pound sterling — a 2 or 3 percent move would be considered big. A 20 percent move is outlandish, a freak black swan event without precedent."

It's not a black swan event if it was predicted, widely, well in advance. Smart, reasonable people declared the policy unsustainable from day one. One good example being Mike Shedlock at globaleconomicanalysis.blogspot.com.

Genuine question then. If you had money to burn (I.e. gamble) where would be the smart place to put it over the short to medium term, and see a tidy return?

not somewhere someone in internet comments told you to put it

Bitcoin! At least that's what they tell me at /r/bitcoin.

You're missing the point of a black swan. An event is a black swan to the Turkey, not the Butcher.

How do you know that you should listen to Mike on this but not the things he said that turned out to be wrong (seemingly more than half lately)?

https://www.backrecord.com/person/mike-shedlock-(globalecono...

It doesn't even have to be predicted to not be a black swan. To qualify it has to be so far outside the range of events accepted as likely that it breaks models used to mitigate risk. This was nothing like that.

A 20% move in a cross between two free floating currencies probably would qualify because the only things that would cause it are catastrophic events (themselves black swans).

A 20% swing after a peg is dropped is exactly the kind of thing that a model would predict, therefore this could only be a black swan if the peg being dropped was absolutely unthinkable which it obviously wasn't.

Anyone who thinks the that the peg was unsustainable should remember a basic bit of supply of demand.

Assume the demand of Swiss francs is "x".

Assume the supply of Swiss francs is "y".

If the price of francs is higher than what Switzerland wants, then:

x = y + z

where z is the amount needed to match supply with demand.

In that circumstance, Switzerland can print z amount of francs -- that is entirely sustainable. And that is what it was doing for the last few years. Keeping the price stable is the same as saying that it was printing z amount of francs, so that y+z equalled x.

Anyone who says this was unsustainable is simply not thinking clearly.

No it's not that simple. Since Switzerland was fixating 1EUR = 1.2CHF there was a new problem arising when the US dollar went up: Arbitrage. People could exchange USD into EUR and then into CHF (source: Official statement of the Swiss central bank). The result: The Swiss Franc was pegged to the USD as well. Now that's some serious pressure, and that's why the Swiss central bank decided to give up on this unsustainable endeavour. And your calculation is nice and dandy, but if z grows too large then you get a massive inflation which is very damaging.

About this:

"if z grows too large then you get a massive inflation which is very damaging"

No! No! No! I am surprised there are so many people on Hacker News who are bad at math. You can not get inflation unless:

x < y + z

but what I wrote was:

x = y + z

you can not get inflation while that is true. Remember, you face deflationary pressure for as long as:

x > y + z

and that is what Switzerland was fighting. Not inflation, but deflation.

You are mixing two concepts. One is the "outside" value of the currency, that is, for how much foreign currency you can exchange it for. The other is the value inside the country. For example, the Swiss frank may appear 20% stronger but croissants in Switzerland still cost exactly the same. If you just print money you will get an inflation inside the country and the prices will go up.

About this:

"You are mixing two concepts."

You have no idea what you are talking about. This creates deflationary pressure:

x > y + z

So long as x is greater than y plus z, then it is cheaper for the Swiss to import their croissants from Italy or Germany or Austria, or anywhere else. And also their microtechnology, hitech, biotechnology and pharmaceutical goods. That is why every article written about this so far says that dropping the peg is bad for Swiss industry, and therefore bad for the Swiss economy. So long as this is true:

x > y + z

then it is easier for the Swiss to import things, because everything outside of Switzerland appears to be cheaper. And that, of course, puts downward pressure on prices from domestic producers as well. Thus, the pressure is deflationary, not inflationary -- the problem is that prices will fall, not that prices will rise.

Inflation is measured with the price of a basket of goods. Inflation is not measured in terms of the CHF-EUR exchange rate. If you keep your equation x = y + z then yes there will not be an inflation in terms of EUR but the basket can (and will!) still be subject to inflation. Because the EUR is not equal to basket of goods. Nobody is going to import croissants because then they'd be days old and taste like shit.

You really have no idea what you are talking about.

Paul Krugman's take: http://www.nytimes.com/2015/01/16/opinion/paul-krugman-franc...

Someone: can you explain why Swiss National Bank could not sustain keeping the value if Frank low against Euro? It seems like the only thing they need to do is to purchase more Euros with Francs they print, right?

I usually see the opposite, where the country, like Russia for example, is unable to keep its currency high, because they don't have enough foreign currency reserves to buy their own national currency.

> It seems like the only thing they need to do is to purchase more Euros with Francs they print, right?

They likely have a policy against printing Francs in arbitrary amounts to not endanger the long-term trust in the currency.

This is the reason the bank gave:

    In a statement explaining its policy, the SNB points to divergence among major 
    economies; in particular, the weakening euro which has hit about the lowest 
    level since its inception.
    
    With anticipated cash injections by the ECB, the euro is expected to depreciate 
    more against the US dollar and as the franc is pegged to the euro, the 
    Swiss franc is weakening versus the dollar too.
    
    So, they conclude that there is no longer "exceptional overvaluation" of the 
    Swiss franc that justified the minimum exchange rate.

It's difficult to un-print money, especially when it's traded away for other currencies. That means you don't necessarily want to finance a move to temporarily drive down the price of your currency by expanding the money supply - if you think you're defending it against a short-term fluctuation (eg, a flight-to-safety from Euro-denominated banks), excess printing will cause the value to be much lower after the transient circumstance has passed.

Seigniorage, the ability of an institution to print a worthless piece of paper that other people believe is worth something, is a very valuable power, one which is earned over decades, even centuries, of prudent policy. You don't want to mess with this by printing billions, at the risk of destroying your reputation (resulting in inflation, and/or speculation against your currency, as others have pointed out).

More prosaically, also, every time the SNB prints a swiss franc, that piece of paper is marked as a liability on its balance sheet (and the corresponding euro amount purchased is the asset). So they optically "lose money" if their assets decline in value versus their liabilities, as happened last week. Of course, they could then print more CHF to cover the loss, but then we're back to my first point.

Finally, and as an aside, the biggest loser in this whole thing was of course the SNB itself, at least on paper. It has CHF liabilities and foreign currency (and gold) assets to the tune of 500bn dollars. On paper then that was a 75bn USD loss. Conversely, and this is worth keeping in mind amidst the frenzy of headlines about broker losses, remember that markets must net off, so all those swiss francs that the SNB sold to defend against appreciation, were held by the market (individuals, brokers, funds, corporates, other governments). Thus it is likely that there are some huge winners out there, whose net wins are greater than the net losses to the tune of about 200bn * 15% (the amount that they intervened in the past 2 years * the percentage move).

Just trying to understand why when the SNB prints CHF it becomes a liability. Is it because whoever they sell it to (in return for some asset such as Euros) can at least in theory redeem the CHF as gold?

Like any liability of any entity, when you possess a swiss franc, you have a claim against the assets of the SNB. The assets of the SNB include a lot of gold and many foreign currencies. These assets have been accumulated in various ways, but are generally the foreign assets of the country in question (held on behalf of the people of the country by their central bank), plus the accumulated profits of the central bank over the years on this capital. Crucially however, just like "goodwill" in a company balance sheet (often a much larger ledger entry than any tangible assets), there is a large proportion of the value of the issuer's paper (be it equity or in this case, money) that is made up of intangible assets. Those intangibles essentially amount to the credibility of the entity, that is, the fact that other people believe that the piece of paper that it issues has value. Thus you have a claim against some of their assets, yes, but you're also hoping, just like with equity, that the value of the goodwill stays high (similarly for GOOG, AAPL or FB or any other company). The value of the goodwill is determined by the strategy and actions of the entity being seen as sound, and ultimately profitable, by the market.

Long story short, I don't personally know of any central banks who explicitly promise gold back against their liabilities anymore (this disappeared at Bretton Woods). Thus your claim is (mostly) on the credibility (goodwill) of the bank which is highly dependent on it not issuing too much paper.

As far as your claim on the tangible assets is concerned (the foreign currencies and gold), you will not be able to walk into the SNB with a 100CHF note and ask for the tangible share of what that represents. In practise, if the CHF loses value, the SNB will (amongst other measures such as raising interest rates and trying to put pressure on its government to spend less), protect your 100 CHF by selling its foreign currencies and gold into the market, "defending" your asset. That's how your claim on the tangibles works out in practise: the assets are paid back out to the market if there is pressure on the currency. Of course, again, only a small portion of the value of the CHF will be backed by gold and FX. The rest of the value comes from the fact that it is accepted by merchants and people in exchange for real goods and services. That's goodwill, otherwise known as "credibility" in monetary economics.

Yes but you can't just print currency indefinately. And with the current economic situation of Europe, you don't want to have too much euros in you reserve either.

It wasn't really inability as much as unwillingness. Yes, you are right all they needed to do was purchase more euros. They kind of decided that is not a good idea anymore.

This is the true reason: https://news.ycombinator.com/item?id=8910109

I wont call the Swiss decision a currency war. Swiss decided for itself, that it wanted to float the Franc again.

But we had a currency war at 16th December 2014 when Rubel dropped by nearly 40% on one day, and went up again next day. This was a currency war against Russia that failed. Russia had to push about US$100 billion on the market at that day, to win this currency war. The other side therefor was likely also a state owned player.

It was most likely investors pulling out even more money from Russia and Russians buying foreign currency.

No problem if ths swiss bank had continued printing francs. E1, E2, E3 and so on in USA make clear the hyperinflation risk doesnot exist in this case. But there will be much harm in swiss companies. Exports in Swisszerland means 70% of GDP. And much harm in Poland and other countries with households buying their homes n swiss franck. So, problemes for their financial systems.

This is funny:

> Central banks are political entities which exist at the behest of government. And as such, they will always need to be mindful of politics if they are to maintain political favor and to keep their independence.

So, to remain independent they need to be dependent of politics.

Good news for ski racers - FIS prizing just got significantly more valuable.

Finally, news about financial markets from a source that knows what it's talking about.

Reply on news.ycombinator.com