NEAR the end of 2014, I wrote “I am planning for a more turbulent 2015.” I expected that to be the tone of different possible scenarios and not a fulfilled prediction—at least not this early in 2015.
The past week, we have seen the Dow Jones Industrial Average index make a 950-point daily swing. Gold has broken above a 26-month downtrend pattern. Crude spiked 10 percent and retraced downward that same 10 percent in a matter of a few hours.
On Thursday the central bank of Switzerland, the Swiss National Bank (SNB), dropped the “Sweet Meteor of Death” on the financial and currency markets by removing its exchange rate cap against the euro. More quietly but of significance, India’s central bank, the Reserve Bank of India lowered interest rates in the face of lower inflation and to encourage more lending to spur economic growth.
The policy change of the SNB is probably of little interest to you. But let me explain it to you this way. The impact of the SNB move is practically the same as President Manuel L. Quezon suddenly announcing that the Philippines is joining with Japan and declaring war on the United States.
Three years ago, the SNB began to “cap” the exchange rate of the Swiss franc (CHF) against the euro (EUR). That is, the SNB would intervene to keep the CHF from appreciating against the euro beyond CHF1.20 to €1. In effect, the Swiss were supporting the global exchange rate of the EUR with its own money.
Certainly, there were advantages to the Swiss economy in that its exporters to advantage of an artificially weak CHF that made their export products more competitive and desirable. However, the Swiss economy has been subject to deflationary pressures for some time because of this policy. That means that the Swiss economy has not been able to grow as fast as perhaps it should have because poor economic growth in the European Union (EU) has spilled over to Switzerland.
The European Central Bank has been trying to fully implement its own version of money printing and quantitative easing through a policy that is being called Outright Monetary Transactions. This would allow the ECB to directly buy sovereign debt.
The program has been held up by legal challenges primarily from Germany as it is in violation of several national laws, as well as other EU treaties. This past week, the European Constitutional Court of Justice ruled that the ECB has unlimited authority to massively inflate (read print) the euro.
The SNB has valid fears that it will be forced to spend more to support the EUR as the ECB prints and prints and the SNB may wind up holding more “worthless” euros.
The SNB has basically supported major central bank monetary policy for three years and now has broken away from the ECB, the US Federal Reserve, and the International Monetary Fund (IMF). That is why I compare this move to the Philippines allying with the Japanese.
The Swiss are now in a better position to join with Russia, China, and even countries like the Philippines to pursue an independent monetary that is more in its own self-interest rather than supporting the economic losers like the US, Japan and the EU. This is a big deal.
The global financial institutions and the governments counted on the SNB to go along with the big boys and do what it was told and are now facing billions of dollars of losses due to the Swiss bank’s move.
By not informing the IMF or the ECB prior to the announcement, the SNB has undermined the credibility of both organizations as the coordinators of global exchange-rate stability. But its own credibility has been significantly weakened in that the “Old Boy’s Club” of the major central banks has been challenged by a Western country and not just Russia and China or even Brazil.
What does it potentially mean for the Philippines?
Up until two days ago, the Swiss franc was a safe haven. As the few safe havens left continue to fall, genuine safe havens of countries with genuine productivity—fueled economic growth, increasing corporate profits, stable currencies and sensible monetary policy will become more attractive. And contrary to what some of the gloom-and-doomers say, that describes the Philippines.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.