Saturday, January 17, 2015

Swiss National Bank action telegraphs ECB QE announcement next week

The recent abrupt change in pegging the Swiss Franc to Euro came to an abrupt halt this week. many market participants were caught off guard. However, I think the big story is that the action is telegraphing a big money printing announcement from the ECB. The Swiss national bank was keeping the Swiss franc exchange rate at 1.20 Euros=1 Swiss franc. The way they were doing this is by printing francs and buying Euros. If the ECB is getting ready to announce a huge money printing scheme to buy EU country bonds there is no way the Swiss could have maintained the peg without printing way too many francs. Here is a good article summarizing what happened.

In a surprise statement that sent shockwaves through equities and currency markets, the central bank ended its cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced less than a month ago. 

The shift marks an attempt by the SNB to reinforce its defenses of the economy before government bond purchases by the European Central Bank that could crumple the franc cap. The currency surged after the announcement, Swiss stocks including UBS AG tumbled and the chief executive of watchmaker Swatch Group AG said the policy shift would hurt exports. SNB President Thomas Jordan defended the move, saying surprise was necessary. 

What this means for me is that my speculation on European stocks should begin to pay off. In fact, stocks in Europe have begun to rally on the announcement as people are attempting to front run the potential ECB action next week.

European stocks rally on ECB QE speculation

As I have said in the past, I am not a big fan of government money printing. It will do more harm over the long term and will not achieve the intended goals. However what we have seen in the past is that risk assets like stocks go up when government print money. At some point in the future people will figure out that printing money does not create wealth. In the meantime one has to put on their speculators and run with the bulls. There really is not much of a choice if one wants to get a return on capital. I would caution though that it is akin to picking up dimes in front of steam rollers. If you get to cute and hang around to long you will get run over so it is imperative to use stop losses and to understand what you are actually doing. 

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