Another day, another central bank takes it in the coffers for trying to counter the formidable deflationary forces sweeping the world. The Swiss economy is export centric (like most others) and the Swiss National Bank has been trying to stop the franc from appreciating through monetary interventions by holding a set peg of 1.20 franc per euro the past 3 years. This morning it gave up and the franc rocketed 14% higher against the Euro and the US dollar. Levered traders are being sideswiped as usual. Many people in other countries like Hungary and Poland had foolishly borrowed money, including their mortgages, in francs the past couple of years. Those debts just got a whole lot bigger to repay. Lenders will face defaults.
Not one of 22 economists surveyed by Bloomberg at the start of January saw this coming, and only four saw it happening in 2016. Global capital is flooding into the perceived “safe haven” of the strengthening franc. This means weaker demand for Swiss exports as cheaper goods from Europe (weaker euro)–along with Japan and China and plunging commodities–continue to export deflation to the world… The weight of over-consumption during the debt bubble continues to mean revert with a crushing weight on central bank ‘interventions’.
Komal Sri-Kumar, global president at Sri-Kumar Global Strategies, discusses the Swiss National Bank ending their minimum exchange rate and the impact of Europe on global interest rates. Here is a direct video link.
Needless to say, companies are unprepared for this sudden shift as well. Swiss stocks are down 15% on the news, while Swiss Treasuries are bid even as they pay negative yields all the way to 9 years. Here is a direct video link.