The Swiss Must not Confuse the Battle with the War23. January 2013 by Joachim Goldberg
Japan’s decision to prod its central bank into buying unlimited quantities of financial assets using printed money is the latest offensive in the so-called ‘currency wars’. The spoken goal of the policy is lifting inflation, but the unspoken one is that of drowning of the currency. Although Japan’s economics minister will claim in Davos that Japan has no intention of manipulating the yen, the country has a long history of doing just the opposite. The US and the UK have also embraced the prospect of a weaker currency as a welcome side-effect of their money-printing activities. And other countries from China to Brazil have warmed to policies that seek to weaken their respective currencies. The question is: which currency will have to rise? In the end, everyone cannot have a weak currency.
In this context, it is somewhat puzzling that Professor Hans-Werner-Sinn, one of Germany’s economic ‘Wise Men’, recently advised the Swiss National Bank (SNB) to reverse its efforts to prevent excessive strength in the Swiss franc. The SNB had promised to limit the franc’s exchange rate with the euro to €1.20 using unlimited means if necessary. After a lengthy battle with speculators at that level for an entire year, the franc has now weakened by four percent. Yet it seems to me that it is far too early to even think about trying to reduce the massive reserves of euros the SNB had to buy over this time. Bear in mind that the intervention bands of the former European Exchange Rate Mechanism were in the order of 4.5 percent, so the current ‘victory’ is hardly spectacular. No sooner would the Bank start to sell off its monster balance sheet, would the euro be pushed back to the level it tried so hard to avoid. Indeed, the market’s mere discovery of the SNB’s intention would be sufficient to inflict psychological damage on the exchange rate, meaning that it would start to drift back to the former intervention level even before the very first official sale.
The best advice for the SNB is that old market adage: let profits run. If the Swiss franc has started to weaken as a result of rising risk appetites, the Bank should let the market trend unfold. Especially in the context of a global currency war, one should not let one’s guard down while bullets are still flying.