IF ANYTHING IN recent memory has resembled a black swan event it is surely the entirely unexpected abandonment of the Swiss franc’s peg to the euro by the country’s central bank the week before last.
It certainly met some of the necessary black swan criteria set out by financial pundit Nassim Taleb: it was high-profile, hard to predict and beyond the realm of normal expectations.
It didn’t meet all of Mr Taleb’s criteria though. It’s probability was computable (black swan events are not supposed to be).
Indeed, so much so that there were vast quantities of positions taken out by numerous institutional punters against the event happening, thanks to the cheapness of the options available in the foreign-exchange futures market.
These were modelled on an array of computer screens from fast-money boutique desks on Zurich’s Bahnhofstrasse (coincidentally the world’s most expensive shopping street before the “Swissie” imbroglio and now a whole lot dearer) to prop traders in London’s Canary Wharf, where many of the bulge-bracket investment banks sit.
FXCM, a large US retail forex broker, said it was in potential breech of capital regulations on the back of client margin trading, and New Zealand-based forex broker Global Brokers was forced to shut in the wake of decision.
As I write this column from Singapore, often referred to as the “Switzerland of Asia”, I wonder what early lessons the monetary authorities in this city-state are learning from the unusual goings-on in the land of the cuckoo clock.
ONE FIRST LESSON is of the dangers of running a fiscally tight ship. Get a reputation for fiscal soundness, no hint of a budget deficit and oodles of reserves and everyone will want to own your currency. Better to be a bit of a doofus at it. That way you won’t have the headache that was presented to the Swiss as their currency’s safe-haven status forced endless rounds of selling the Swissie by the central bank against euros.
Not only did the bank not have anywhere suitable to park its vast hoard of euros – there being no euro T-bill market – but Swiss banks meanwhile went out and got exposure in other currencies against their strong franc.
We do not know what the losses will be on a consolidated basis, assuming they remain on paper for now. If the Swissie remains strong, those losses will be painful.
The other lesson is about currency pegs. They just don’t work. Nowhere do they know that better than in Asia where absurdly overvalued (not undervalued as was the case with the Swiss franc) pegs wreaked havoc on the region’s economy in the late 90s when speculators took aim at them.
In the case of Switzerland, the authorities there committed three years ago to buy an unlimited amount of euros versus the franc in order to keep a lid on its appreciation. But, apparently, a recent massive surge of Swiss franc buying prompted the SNB to throw in the towel. As I said, currency pegs don’t work.
I still don’t think the full impact of the Swiss franc’s unshackling has been felt
WHICH BRINGS ME back to the Singapore dollar. I recall a few years ago a massive surge in Sing dollar-buying prompting the highest volatility seen in the country’s short-term interest rate, Sibor.
But, over the past six months or so, the Singapore unit has exhibited a divergent path, falling against the US dollar and surging against the Malaysian ringgit. For those US trade hawks who regard the Singapore unit as perennially undervalued, the recent price action will have raised hackles.
More to the point, punters who shop around and who now regard the Swiss unit as fairly valued must surely now view the currency of “Asia’s Switzerland” as looking rather cheap versus the US unit.
This is particularly true given a recent rise in short-term interest rates in Singapore – yes, you earn interest on cash held in Singapore dollars rather than having to pay for the privilege (75bp at the last count for short-term Swiss franc deposits).
I still don’t think the full impact of the Swiss franc’s unshackling has been felt, and that is another characteristic of the black swan event. Quite how it will reverberate is difficult to tell, although I imagine a vote in favour of the opposition in this Sunday’s Greek general election might answer my question. A Greek exit of the euro then looks likely, in which case the Swissie/Grexit black swan will take flight. Talk of a euro break-up will return, and eurozone bond prices will again collapse.
This will occur against the countervailing forces of a quantitative easing from the European Central Bank. QE couldn’t have come at a better time, although I suspect if Greece does exit it will all be a little bit too little too late.
I have always viewed QE as a frightening experiment in the face of desperation. The US and Japan have so far managed to make it not appear so. I suspect as Europe gets onto the bandwagon, it will be third-time unlucky.
In the meantime, I’m wondering when the buying surge into Singapore dollars will happen. It can’t be too far away. After all, if you do it all a little bit too well, everyone wants to get their hands on your currency.
But it would be too early to suggest that Singapore will imminently face the conundrum which the Swiss faced.
