Hoping for Inflation Amid a Double-Dip Recession
This past year, the spending of Labor Day also ushers in an particularly hectic week for the world’s key banking institutions. Already, the Swiss Principal Financial institution needed aggressive steps to halt the Swiss Franc’s ascent, although the key financial institutions of Sweden, Japan, North america, To the south Korea, Indonesia, Malaysia Australia and the Philippines all meet this few days, as achieves the Bank of England and the Eu Principal Bank. To cap it off, elliottwave finance ministers of the G-7 meet at the end of the week in southern France, where it is assumed policy coordination is on the agenda.
For the Asian nations on the list, expectations are that they will err on the side of caution. They will either openly adopt more accommodative policies, or at least stop tightening. Indeed, Brazil’s central bank met last week and unexpectedly cut interest rates even in the face of higher reported price rises. Like most major high-growth exporters, Brazil has decided it would gladly trade an uptick in inflation if it means growth continues to hum along.This applies to the U.S. as well, although you will never hear it mentioned by the Fed. We’re certain that Ben Bernanke (not to mention President Obama) would welcome a little inflation if it meant U.S. GDP growth returned to the 4% range. The problems faster growth would help to solve – unemployment, tax receipts, etc. – seem much more intractable at the moment, although from a macro-economic perspective policymakers should be careful what they wish for.
Meanwhile, it is the action of the Swiss Central Bank that has captivated our attention. We discussed the ascent of the Swiss Franc in our last issue, and have been watching it closely for an entry point ever since. It may have just arrived.
It has not been since the breaking of the British pound in the early 1990s that we have seen this kind of rhetoric coming from a country’s monetary authorities: “The Swiss National Bank (SNB)…will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities”. The SNB explained further that “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.”
We’ve seen this movie before, and if past is prologue, the key phrases here are “unlimited amounts” and “utmost determination”. The SNB is aiming to set a line in the sand and show the markets that it is willing to do whatever is necessary to create conditions that result in a sustained and significant decline in the Swiss franc versus the Euro.
The kicker is that the Swiss national bank alone does not have the ammunition to defend its currency against global binary options markets for any length of time. It had roughly $233 billion in foreign currency reserves as of 2010. Its gold reserves, which are significant, could in theory be sold off to generate foreign exchange, but that is an extremely drastic and unlikely step. This means the Swiss position has effectively no lasting teeth without the cooperation of other central banks in the world – notably the U.S. Fed and the ECB.
But we’d be surprised if either one is terribly inclined to support a strengthening of their currencies against the Swiss Franc. In the face of a potential decisionbar double-dip recession, twin debt crises and the potential implosion of the Western forex union, whether elevated exchange rates are squishing the Swiss economy is not heading to be elevated on the list, and forex investors realize it. Additionally, defending foreign currencies is a horrendously costly situation which background has proven solely truly works – if at all -over the shortest of terms. Short of outright forex controls of the type exercised by China, To the south Africa in the 1990s, etc., there is quite wee reason at this direct to assume the SNB’s peg could finally total volume to anything various compared to rhetoric. As in the past, altering worldwide forex flows is likely to be out of the ability of any one little country enjoy Switzerland. Expect the Swiss Franc to industry sharply straight down on the news of the peg, stabilize, and afterwards keep going a tentative but consistent march back again upwards.