Friday, December 19, 2014

Fog of War


I think this man must be worried. He has a huge weight on his shoulders. This is Thomas Jordan, the head of the Swiss National Bank.




Mr. Jordan has excellent academic credentials.  He’s a scholar, and a ‘lifer’ at the SNB:

University of Berne, PHD Economics

Department of Economics at Harvard University,three-year post-doctoral research.

1997 SNB Economic Advisor in Department 1.

On 18 April 2012, appointed Chairman of the Governing Board of the SNB.


 Unfortunately, Mr. Jordan’s academic prowess is not going to be of much help with the mess now on his desk. He needs to learn how to play – and win – heads up guts poker. In my experience that’s a skill one is born with, or never acquires.

Jordan is a General who has a war on his hands. It’s a currency war; only financial blood will flow. But the stakes are high. Mr Jordon understands that more than the Swiss economy is at risk. The idea of the “All Powerful Central Bank” is being called into question. General Jordon is on the front lines of a conflict that could spread throughout Europe, and then to Japan.


Thomas Jordon has enormous power. He can print a biblical amount of money with a keystroke. He’s pledged to do exactly that. But, Jordan also has some significant strategic weaknesses:


- Jordan has no allies in this war.

* The US Treasury has put the SNB on its watch list of ‘currency manipulators’. Don’t look to the US Fed to get involved in this fight.

* The Japanese could care less about the Swiss war – they’re trying to wage their own war.

* The SNB has no friends at the ECB either. If anything, Mario Draghi is working against the SNB.

- Jordon inherited the Swiss Franc peg policy. He came in when Hildebrand was thrown out. For the first time in his tenure he’s being called to fire his guns in anger. He’s an academic, not a warrior.

- Jordon is playing defense. He has promised to hold a line in the sand regardless of the consequences. So Jordon must now stand and take on all comers. The circumstances in Switzerland are today 180 degrees opposite to that of England twenty-years ago. That said, this story is looking a hell of a lot like the devaluation of the Pound. Who can really say, “I’ll take em all on at once!”

- There is a “stink’ feature to the CHF peg policy. The benefits to the Swiss economy from the peg are at the expense of the French, Italian and Spanish economies.

- The peg policy has the support of the Swiss Parliament – for now.

- The Macro story outside of Switzerland is piling up on the SNB:

* Draghi has promised that a decent sized bazooka will go off at the next ECB meeting (1/22/15). One of Draghi’s objectives will be to cheapen the Euro – exactly what Jordon does not want to hear.

* The ongoing Russian story is a factor that increases the need for a safe haven for hot money. Zurich and Geneva have always been a destination for money looking for a safe harbor.

* Greece is going to go down to the wire on December 29 with the final vote. It will be very close. There is a real possibility that GREXIT comes back onto the table. This development would bring with it huge pressure on the EURCHF.

* The Yen is the worst place to hold reserves. Some of the money leaving Japan is headed to Switzerland. There is no safe haven left – but the CHF still comes close. All those Francs will have to be sold by Mr. Jordon – there are no other sellers.


The one thing that Jordan can’t do in this war is appear to be weak. He has to be decisive if he is to win. He has to take on the FX market and beat it to submission.  Mr. Jordon is off to a bad start – I think he pulled a weak move this morning.

The SNB announced that it was going NIRP. For a few minutes there was some market shock and awe. But the new SNB rate will be -0.5% – that’s nothing! The new SNB measures will not take effect until 1/22/15. This coincides with the Draghi bazooka. What the SNB has done is create a beacon that is shining on a date that is only sixteen trading days from today. The SNB should have made the measures immediate, and more costly if it wanted to win a skirmish in the war. But it chose to let the players off easy.

EURCHF forward swap bids got hit this morning with the news of negative interest rates. The swap is the cost of being short the EURCHF. As of the close in NY the two month forward EURCHF swap was a crummy 8 ticks!


Screen Shot 2014-12-18 at 5.26.53 PM

This is not a penalty at all. 8 ticks goes by the spot market in seconds. This cost is not going to keep the players at bay. It’s an incentive versus a disincentive. Round One was a disappointing draw for the SNB. Round Two will start in January.






  1. Eric the Aussie says:

    Nice to have you back Bruce and congrats on your latest insights on the Fx war. I can’t pretend to be across the whole thing but we certainly seem to be heading towards some sort of climax as all the easy options run out. Interesting times we live in.

    Keep up the good work.

  2. How can he lose? Forgive me, but I’m completely naive when it comes these FX wars.

    He loses if the Franc goes bid? From an accounting perspective, the SNB will incur losses, but wouldn’t that mean more ammo? I mean, if your currency is strengthening …….. who gives a shit about your losses? Sell MOAR!

    Seriously, this play looks like the SNB is slowing down reality to let the elite IN. Tell me how this isn’t a subsidy for the ultra wealthy? Swiss industry will no doubt be hurt. But, who gives a fuck? It will make it more exclusive and that much more in demand.

    Maintaining independence deserves a premium. I have no idea why the Swiss are selling themselves short.

  3. if I was head of the SNB on 1/22/15 I’d call Super Mario’s bluff about this outright QE nonsense. Draghi’s been dangling a carrot ever since he took office and I dont see why that’ll change in january. Too many hurdles to make outright QE a reality.

  4. Hi Bruce,
    Small tip – you need to look at FX implied yields.
    3m EURCHF is now -44bps (having been -40/-30 Jan-May, then -15/-5 Jun/Dec before plummeting after dec ECB & SNB -ve).
    It freq falls off at year end, so we’ll look to see where it is early Jan.
    Have a great holiday.

  5. Anything for 2015 and beyond?