Turkey, Swiss and a side of Argentina
Anthony Peters looks at three examples of currency defence.
Crisis over? After two or three volatile sessions, it appears that markets, even emerging ones, have decided that it is too early to call the end of the world and even if the Fed does withdraw another small tranche of its very, very generous stimulus today, there is still a tomorrow and, believe it or not, the sun will still rise in the East and set in the West.
The bungee jump which the Turkish Lira has undertaken is quite amazing. Yes, it has been weakening persistently since the beginning of the year and yes, there are social and religious stresses which cloud the horizon but the panic either side of last week-end was simple madness. To put the thing in context, the currency opened the year at TL 2.15/US$. It traded down to TL2.17 late in January 2nd and remained around there until January 13th. Then the pressure began to build and by last Thursday at had crumbled to TL2.30. Then it went nuts and in the stampede on Monday hit an intraday low of TL2.39. Woe betide those who sold it there for this morning, Wednesday, following the Central Bank’s emergency action of hiking rates from 7¾% to a punitive 12%, it is back at TL2.17.
In my own quiet way I take my hat off to the TCMB for reminding all those PhDs and MBAs and CFAs who supposedly know everything about managing investments and the concomitant risks that, despite all the letters they have behind their names, many of them are just overblown, overpaid kids in a candy store.
However, it should also remind politicians and regulators in Brussels who are working on the stalling model for banking union that one can legislate against pretty much everything other than fear, greed and stupidity.
In the summer of 2011 the Swiss National Bank declared that it would no longer tolerate the Franc to trade any higher than SFr1.20 to the €. In doing so and in facing up to the speculators, it broke a longish spell of markets – that being hedge funds – outwitting and outspending central banks. The monetary authorities had appeared powerless in the face of any kind of speculative onslaught by fast money. The SNB has very deep pockets and eventually the markets surrendered, marking a shift in power away from Mayfair and Greenwich and back to national capitals. The TCMB might well have been emboldened by the SNB experience – there is no longer a need to lie back and think of England.
The fate of the Argentinian peso is of course an entirely different kettle of horse, as is that of the black market value of the Venezuelan Bolivar. Two ailing economies in the hands of populist demagogues in denial in one region is bad enough in itself but the propensity of large investors in the developed world to lump all of Latin America into the same benchmark or index means that an allocation of funds away from the area naturally prompts a wholesale withdrawal from otherwise innocent economies too.
Rarely is the analogy of the one rotten apple spoiling the barrel more apt as the issues facing all individual countries involved are stripped bare. Big deal! Name one country, any country, which is without problems and I will show you Utopia. That the Central Bank of Argentina should decide to preserve its currency reserves and not hand them to the hedgies for free is not only sensible but also sends a clear message as to what it thinks of a certain lady, if lady is the correct word. An aspiring Eva Peron Mk II maybe but surely failing in the quest.
Meanwhile, I read this morning that Antony Jenkins, CEO of Barclays and successor to Bob Diamond, is about to announce a significant restructuring and resizing of the bank. The most striking feature is the plan to close around a quarter of Barclays’ 1,600 high street branches. I have no desire to see the blue vulture sign removed from the market square in my home town of Chipping Norton in rural Oxfordshire but if I ask myself truthfully how often I have set foot inside it and availed myself of its personal services in the past 10 years, I might not even have to borrow anybody else’s fingers to effect the count.
That Jenkins would review Barclays’ commitment to investment banking was nigh on certain but most had expected him to sacrifice Barcap for the benefit of the retail franchise. That he would consider taking a scalpel to that too will come as a surprise many, if not most. What it does do above all is show how deeply Labour leader Ed Milliboy and his chief attack dog, Ed Balls, are out of touch as they are still trying to find a way of strangling an incarnation of the banking sector which effectively died in 2008.
In September 2010, I wrote a column for the Daily Telegraph in which I predicted that banking would right itself over time and that legislation which closed the barn door after the horse had bolted would be an exercise in futility. The reshaping of the banking landscape was never going to happen overnight but Barclays seems to be progressing well after having handed the power back to the domestic banking chaps.
As internationalist investment bankers we might think it all to be horribly wrong but we might now understand a bit more clearly what it must have felt like to be a coal miner in Wales when British Rail announced that it planned to scrap steam engines and switch to diesel.