Main

georgedorgan


The Swiss National Bank and Swiss Franc Blog


Rumors about tax on Swiss deposits for foreigners and further SNB measures: SNB begging for pips
Main
georgedorgan
Exactly when the US had a relatively good Markit Flash PMI, rumors are sent out that deposits in CHF for foreigners should be taxed.  To send out this rumor together with good US data seems to be intentional
 
According to Banque CIC the SNB has declined to comment. We remember the last SNB meeting when similar rumors circulated.

Traders should remember that the SNB has circulated the "negative interest" for CHF deposits rumor already for decades. Swiss banks will be strongly opposed to such a measure. Due to the strong integration of financial markets, CHF deposits held outside of Switzerland could not be controlled. A big loss for Swiss banks !

The Swiss economist Hans Kaufmann said:
"The money market for Swiss franc has long been a presence abroad, where the SNB and the Federal Council have no control. The negative interest rates in 1979 have not brought the hoped-for success. Foreign-issued CHF accounts were not subject to negative interest rates. CHF bonds issued by Swiss organizations and corporates were already in 1979 exempted from the negative interest tax. This cannot be changed today even less likely, because it violates recent Swiss tax agreements ('European withholding tax directive, double taxation agreement with the US'). On changes on the tax status these bonds would mature ('i.e. could be put') immediately." (translation of here with some explanations in single quotes).

Some think tanks report that the SNB is considering other measures, but you should remember that Swiss exporters are currently relatively happy with the USD/CHF at 0.96 compared with a USD/CHF of 0.71 in August 2011, given that about 40% of Swiss exports are dependent on the dollar and dollar-correlated currencies like the CNY, the GBP and the JPY (source). Still one should add the effects of the interest rate/inflation parity (2.7% US versus -1% Swiss inflation), an effect which makes Swiss production cheaper over the time.

If the SNB is concerned about the recent inflows into the franc, this does not mean that they will lift the floor. The SNB simply does neither want to lower the floor, nor to continue spending lots of money on euro buying !

In other words: Buy the US dollar and sell the euro, but leave us alone ! We are happy with the EUR/CHF peg !

To our minds, you should trade with the SNB traders, who will intervene soon and sell the EUR/CHF and happy to get rid of some euros of their heavily overloaded balance sheet. Hence the SNB was just begging the small forex trader for some pips. 

Comment three hours later (16.33 GMT): The EUR/CHF spiked at 1.2076 today,currently to 1.2024, and will probably fall back to the peg level of 1.2010 later, when SNB traders are picking even last single pip of any lost Long EUR/CHF trader.


 
-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

Why the floor will never be lifted to 1.25 ?
Main
georgedorgan
Or why the biggest opponents of the SNB are not Weltwoche and the SVP (Swiss People's Party) but the Federal Reserve



Comment May 28th 2012:

Since some days later chairman Jordan confirmed our strong suspicion, this post on the floor hike to 1.25 will not be continued.

Will the SNB double or triple the forex reserves before they give in ?
Main
georgedorgan

We have switched to the new site www.snbchf.com. This text is available under http://snbchf.com/?p=25 

Some economists have claimed that the Swiss National Bank (SNB) will be always able to maintain the floor. As opposed to George Soros' defeat of the Bank of England, the SNB is able to print money ad infinitum, whereas the BoE had limited currency reserves to support sterling. The question, however, is where this "infinitum" is, and what happens, if caused by strong inflation or a strong Euro depreciation, the inflows into the Swiss franc get bigger and bigger.

Between March 2011 and September 2011 the Swiss National Bank (SNB) was buying FX reserves more or less for the equivalent of 205555 mil CHF deposits (which is on the other side of the central bank balance sheet). That was five times (!) their previous deposits.

The SNB strategy to sell euros even if the market was betting on a hike of the floor, helped the central bank to reduce deposits by 35446 mil CHF, as measured in deposits by local banks and other sight deposits, i.e. real money supply; bank notes and the recently increasing in deposits by the Swiss confederation are excluded), what is about 17% of what they bought before.

Since one week the SNB is on the buy again. In one week they had to borrow 10% of the 35446 mil. CHF they could pay back before. The effect of the seven months money supply reduction seem to vane quickly. This is even more dangerous for the SNB since the YoY inflation might top at about +1% to +1.5% in August 2012 before it falls again later. Markets might think that the SNB is afraid of inflation and put up even more pressure on the SNB. 
 


Our question is now: How high will the deposits rise this time, will they double or triple their Forex reserves ?
Chairman Jordan was confident one year ago, saying that the central bank can go into negative equity.
Will they double or triple their FX reserves and wait till inflation really shows up or will they give up earlier ?

Implementation of the peg

We reckon that the central bank has introduced an automatic peg mechanism which obliges them to buy euros at exactly 1.2010 and sell euros above this level. If they sold more euros than they bought, they are happy to have offloaded some items of the overloaded balance sheet. If they bought more euros than they sold, however, there are some "superfluous" euros. They might sell these superfluous euros against a basket of USD, GBP and JPY, which pushes the euro down against this currency basket - something that Swiss and German exporters will appreciate. More details about this "slow move towards a CHF peg against USD, JPY and GBP via currency reserves" can be found here.

This strategy works perfectly as long as nobody wants to sell dollars against francs, but this exactly happened last week and now flows seem to reverse: Money is flowing from the dollar (and the other basket currencies) back into the franc.


-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst


Why the SNB fixed the peg at 1.2010 and not at 1.2000 ?
Main
georgedorgan

As we have showed in a preceding post, the SNB seems to have decided the peg the franc to the euro at 1.20. Therefore the SNB traders were actively selling euros and buying francs even close to the floor limit of 1.20.
But then in the beginning of April some Asian traders managed to push the EUR/CHF under 1.20 (see below) and the SNB had reason to be very embarrassed. Some Swiss papers reported that this had destructed more SNB credibility than the Hildebrand affair did.


 
At the beginning of May the SNB seem to have decided to introduce a safety margin of 10 pips in order to give these traders, (and implicitly the own traders !) less chances to hurt the EUR/CHF floor and reduce the SNB credibility.

We reckon that the central bank has introduced an automatic peg mechanism which obliges them to buy euros at exactly 1.2010 and sell euros above this level. If they sold more euros than they bought, they are happy to have offloaded some items of the overloaded balance sheet. If they bought more euros than they sold, however, there are some "superfluous" euros. They might sell these superfluous euros against a basket of USD, GBP and JPY, which pushes the euro down against this currency basket - something that Swiss and German exporters will appreciate. More details about this "slow move towards a CHF peg against USD, JPY and GBP via currency reserves" can be found here.
 
This strategy works perfectly as long as nobody wants to sell dollars against francs.  But this exactly happened last week and now flows seemed to reverse: Money was flowing from the dollar (and the other basket currencies) back into the franc.


-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst
 





Big bid on behalf of the SNB ?
Main
georgedorgan
Markets report a 7 bln. bid on behalf of the SNB.

We will report asap the SNB May 25th monetary data which will give a prove of these rumors. Here the May 18th data where the SNB had to raise additional 3.7 bln. CHF to buy euros.





-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

The vicious cycle of the US economy or why the US dollar must ultimately fall again
Main
georgedorgan

Just some simple words about the vicious cycle of the US economy and the consequences on the US dollar:

A stronger USD will not rescue the US economy, quite the contrary. US companies will not hire in the US, but outsource or hire overseas. If they hire in the US, due to the high number of unemployed people, real wages do barely increase (see BEA data below). Wage increases need domestic growth or growth via exports.




But US companies cannot compete internationally with a strong dollar and with declining productivity; therefore the growth via exports is blocked.

Domestic growth is not possible, because the main domestic factor, the housing market remains depressed. Tax increases are looming next year.

If wages do not rise, only deficit spending (see table above) or strongly cheaper gas prices may boost US consumer spending (like in November/December 2011). Spending, however, but will boost gas prices upwards (like seen in February/March 2012) and increases the US trade deficit, pushing upwards the foreign incomes of the trading partners and as ultimate consequence the USD down again.

If it is not the markets and bad US economic data, that push the US Dollar down, at the end it will be the Fed, because prices will have declined so much, that they are able to do Quantitative Easing. With a continued rise of the dollar, wages nearly down, shelter taking 32% of the CPI basket and imports about 15%, only some months are missing to see QE3. *
Surprisingly it was the normally hawkish Minneapolis Fed President Narayana Kocherlakota that emphasized that easing was looming.


The currencies that take profit of the bad US trade balance, are
  • the Japanese Yen (JPY), where in April exports to the US increased by 42.9%, but imports only by 4.4%.
  • the Singapore Dollar (SGD), a country with an ever strong trade surplus and where inflation is tamed via currency appreciation.
  • the Norwegian Krona (NOK), where huge oil and natural gas exports guarantee a trade surplus every month
  • the Euro (EUR) with investments into the German economy via the DAX (see trade balance differences among euro zone countries). The export-leaning MDAX, however, is for us currently overvalued. German banks partially hedged PIIGS exposure and have strong incomes from German HNWI's. Energy providers like EON and RWE, that lost a lot in 2011, are also contained in the DAX, have upwards potential when a future bad German finance situation will need a rethink of the German nuclear exit strategy. In the case of complete break-up of the euro zone the DAX investment will revalue thanks to the re-introduced Geman Mark.
  • the Swiss franc (CHF) through investments into their exporters and bank stocks, because the Swiss National Bank (SNB) artificially supports these companies via a cap on the franc. Swiss banks UBS and Credit Suisse are also a buy for us because their wealth management have big risk-off private-banking inflows from the continued property selling in the Emerging Markets (e.g. Brazil or China).
  • the maybe most important argument if favor of EUR and JPY is the diversification strategy for the Chinese currency reserves from the USD and the Yen-yuan direct trading. Apart from these two SDR currencies also the SGD and the CHF (as euro without risk) might be subject to the Chinese diversification strategy.  
  • Due to the Greek problems we recommend risk-averse investors to wait with currency forwards or swaps into the euro and the franc until Greece will have left the euro, a scenario which is realistic for us. Given that most politicians  and the Bundesbank now think that the financial markets can cope with a Greek exit, we believe that the German government will not give in as for austerity measures, in order to satisfy German voters. On the other side the upcoming winner of the Greek elections, the left-wing SYRIZA,  will not give in neither as for austerity measures. The result will be sooner or later the Greek euro exit
  • We do not recommend neither commodity currencies (especially AUD, NZD) nor gold, because those investments are sliding with the Chinese slow-down, even if they could take profit of US Quantitative Easing speculations.
  • We are short the S&P 500 till QE3 takes more shape.
The composition of this currency portfolio (JPY, SGD, NOK, CHF and EUR, all of them long against USD) depends on the market expectations of the investor. The JPY is by far the most risk-averse, we believe that one should overweight JPY in current market conditions and slowly rise the part of the other currencies. 


*There is only one argument against QE3, this is recent rises in rents despite falling house prices. This could push the shelter CPI component (containing both owner-occupied house and rents) upwards.

-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst

I

Is the play time over for the SNB ? SNB Buying Euros Again, but the EUR/CHF does not move a pip
Main
georgedorgan

As also noticed by Credit Suisse, the Swiss National Bank had to buy euros and sell Swiss francs in the week of May 11th to May 18th. Their recent easy strategy to sell euros and buy Swiss Francs and to diversify from euros into other currencies may not continue.



Till May 11th, the SNB world seemed fine: Risk-averse investors preferred to invest in the US dollar instead in the franc. The SNB was able to reduce money supply (as measured in domestic bank deposits) from 160281 mil to 154627 mil. in the preceding 1 1/2 months, they sold francs and borrowed at the Swiss confederation (main component of the 67094 mil. above).

The intensification of the Greek crisis and newly and even more IMPORTANTLY bad US economic data and new QE3 speculations, however, let the global demand of francs and therefore the SNB money supply quickly increase again. The increase of the US dollar index seems to be limited at the long-term (here see why).



Even if the SNB seemed to have reduced liabilities at the confederation (Other deposits from 67094 mil. to 65911 mil.), net sight deposits increased by 3.7 bln CHF (from 218 bln to nearly 222 bln), a clear sign that the central bank is buying euros again. Unfortunately for the SNB the EUR/CHF did not move a pip.


-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst


The history of the North-Euro ("Neuro") introduction: A retrospective from the year 2030
Main
georgedorgan
A retrospective from the year 2030 on two decades of failed european integration politics and 10 years of successful disintegration politics

Currently in draft


2012: The chaos of the Greek euro exit

In the year 2012 Greece was forced to leave the euro 
. After austerity measures hit the country hard, tax revenues strongly fell. Due to the strong euro and to civil war fears, Greece's main source of income (16% of GDP), the tourism, dropped by 15 in Q1 2012.


2012-2014 Increasing contagion 


2014 The second Financial Crisis: Portugal exits the euro


2017 The Recovery: Chinese wage inflation take a hit on developed economies


2018 Inflation in Germany and Finland topping 3.5%, but the ECB still reluctant to hike rate


2019 Northern euro zone countries secretly prepare alternatives to the Euro


2020 Finland leaves the euro zone and introduces the North Euro "Neuro", Neuro rises surprisingly only by 10%


2021 The Netherlands and Austria join the "Neuro", Neuro rises by 5%, NECB (Northern ECB) created


2022 Belgium and Luxemburg join the "Neuro", Neuro rises by 3%


2023 Germany quits the euro zone as planned and joins the "Neuro", Neuro rises by 25%, Euro plunges



2023 The Euro is officially renamed to "Seuro", the ECB to SECB and moves to Rome


2023 German exporters feel the pain, but construction and consumer spending help 


2024 Thanks to devalued Seuro France achieves a trade surplus, Italy a strong primary surplus  




2025 French and Irish politicians put pressure SECB to hike rates, but SECB still reluctant



2026 France leaves Seuro zone and introduces the New French Franc, Seuro plunges by 15%

2026 Ireland leaves the Seuro zone: currency area of the "British-Irish Pound" created

2028 Thanks to devalued Seuro Italy and Spain have first trade surpluses, Seuro surges by 15%

2028: Greece, Portugal, Croatia, Bulgaria, Romania and Hungary join the Seuro Zone


2028: Sweden and Denmark give up their local currencies and join the Neuro






2030: Switzerland gives up the franc and joins the Neuro
 


























Forthcoming articles
Main
georgedorgan


1) CHF export-weighted exchange rate has strongly fallen, how many subsidies is the SNB willing to pay?

2) Doomsday Financial Blogs: The Answer of Free Minds to the Always Positive Official Prophecies

3) The G8 has decided that European consumers should spend now  instead of austerity
Just looking which world or European consumers will really start to spend now ?
Or why giving the periphery more money to play with does not make sense.

4) Currencies are currently back to par value like bonds do
Why certain currencies do not go back to fair value but continue to appreciate


Italy: About the Hypocrisy of Politicians and the Blindness of the English-Speaking Financial Papers
Main
georgedorgan
Just a little wrap-up of two tweets read in 5 minutes, to which I finally added a bit more out of my recent Tweets.

One Tweet:
The British finance minister Osborne has emphasized that the euro zone needs to protect its peripheral economies.
"The whole of Europe needs to become more competitive and productive. That means reforming welfare systems, investing in infrastructure, more job-friendly employment laws, better education and lower business taxes," 

The other Tweet:
In the meantime the hero of the English-speaking press Super-Mario Monti, raised the tax on commercial property (IMU) by +243% YoY.

The Effects of the Monti Reforms

The main positive measure of the Monti reforms is the increase of the pension age to 66, the inflation adjustment will be eliminated, the pension system will switch to defined contribution resulting in an average decrease of the pensions of 15%. That italians confronted with this decrease in pensions, stop consuming and save more, is it a wonder ?

On the other side Italy's tax burden is to increase to 45.1% from 42.5% in 2011. VAT rises from 21% to 23%, workers' contribution rise between 130 Euro and 1700 Euro per person. As said above property tax increases enormously. Strange that these leading economists, that worked previously for the ECB, seem to have never heard about the Laffer curve ...

Here the full of reforms in our Google blog

After Italy managed to reduce its debt-service costs from 11.5% in 1996 down to 4.6% thanks to the euro introduction they are estimated to rise again, namely to 5.4% in 2013 and 5.6% in 2014. The following graph from the FAZ compares the debt-service costs above with the increase of the GDP below.




But thanks to the Monti "economic wonder" the Italian primary surplus would rise from 1% in 2011 to 3.6% in 2012 and 5.7% in 2015. This would help to reduce the deficit from 120.3% of GDP in 2012 to 110.8% by 2015. 

But already in April they admit that their initial growth perspective was not realistic and reduce the growth expectations a minus 1.2% of GDP in 2012 and slow growth between 0.5% and 1.2% till 2015. Since the pension reforms will not lead to enough income for rising the primary surplus, more tax increases are looming, which again will harm growth. A vicious cycle.

Different Estimations on the italian future and its future debt

The leader of the Italian statistics body (ISTAT) recently said that Italy has lost 20 years. The real incomes are 4% under the ones of 1992. Productivity rose between 1995 and 2007 by 0.4%, whereas it was 2.2% in the rest of the EU. Applied to all production factors it was even -0.14% per year.

Some leading economists had to estimate the probability that Italy is able to pay back its debt.

The positive one (Nicola BorriGianfranco di VaioGiuseppe Ragusa) takes as premise of their analysis the official Monti budget above:  
Italy is supposed to have a primary surplus of 4.6% in 2016 like it had before the financial crisis and even before the introduction of the Euro (when it was able to devalue the currency).

However they state: "The goal of economic adjustment is within reach, but, as also pointed out by Manasse (2011), requires hard sacrifices in terms of future primary balances."
 
The negative one of Barclays Capital, however, assumes only a primary surplus between 0% and 2% and foresees that Italy will "wreck the Eurozone".

Ask just some more Italians: They will say: Like all Italian governments they promise but they do not hold what they promise. They just increase taxes, but nothing will change. If they are called Berlusconi, who does everything to upset to the English-speaking papers or Monti, who is nice and eloquent to them. 

Personal Opinion

The author of this blog studied in Rome in 1992/1993 at the famous University La Sapienza, he speaks perfectly Italian, stays often in Italy, loves the Italian mentality and culture. At that time he realized that the differences as for bureaucracy and functioning of labour markets and society between Italy on one side and Germany & Switzerland on the other side are very big. Recent stays in Italy and the discussions with his Italian friends have confirmed that between 1992 and 2012 effectively nothing has changed. On the contrary life in Italy has become more difficult, the bureaucracy is becoming bigger and bigger. According to my friends the only one who has the possibilities to escape is the entrepreneur: He is able to abuse the employees paying low salaries and giving only fixed-term contracts. The recent labour reforms only improve the position of the employer, the potential tax evader. Most italian companies are small family enterprises, where succession and heritage does not imply that the right person looks after the company. These owners often do not really care about innovation. The recent crackdown on the employers in Cortina d'Ampezzo showed only the top of the iceberg of the malfunctioning.


-------------------------------------------------------------------------------------------------------------------------------------------------
The views expressed are our own. Follow us on Twitter.
For anybody interested in more details on the Swiss Franc see our February paper
George Dorgan, Fixed Income and Global Macro Portfolio Manager, Switzerland, formerly UBS analyst


?

Log in