Welcome to the global consequences of QE2
Subject: Ben Takes Out the SNB?
Source: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero
Author: Bruce Krasting
There are a dozen different barometers for economic stress in the EU. They are all pointing higher. CDS and bond spreads are going through the roof. There are riots again. While it is not a new story, the fact that Belgium is now going center stage in the EU mess is a very interesting elevation of risk. Geographically speaking, we have reached the core.
For me, the best measure of stress has always been the EURCHF. That pair is sending off alarms. We are just a tad above the all time low of 1.2770. I see no reason why a new low should not be set by the NY open.
The strong Swissie, weak Euro story has been with us for quite a while now. This graph shows how far we have travelled on this cross.
It is easy to blame all of the weakness in the EURCHF on the ongoing circus in Disney Euro Land. But I think there is more to the story. The recent meltdown in the cross started on 11/3/2010, the day that QE-2 became a reality (surprised?). I never have believed in coincidences, this time is no exception.
As of the end of the third quarter the Swiss National Bank reported reserves in Euros totaling 90.9b. If the year-end rate is the same as today it translates into a three-month loss of CHF 5.5b (USD 5.6b). On a population-adjusted basis this would be the equivalent of a $214b loss in the US. On a GDP comparison this is equal to $160b. Can you imagine if the Federal Reserve had a loss in three months of that magnitude? Ron Paul would shut them down. This is a big deal for little Switzerland.
The problem that the market faces is that the year is not over. Liquidity between now and year-end is going to get thinner and thinner. Big risk taking and big FX books are not in the cards this holiday. That being the case, some unanticipated things might occur.
Watch out for gaps in currency trading for a bit. If that starts to happen and volatility jumps up it will spread to other markets. I think markets have been "thin" across the board for some time. Equities are just robots moving paper for the most part. The big jump in global bond yields of late stinks a bit of liquidity issues. FX volume has been heavy, but are there folks who are willing to take on big new risk if money starts moving? I wouldn't think so. If money decides it does have to make a move over the next few weeks, then it's likely to have an out-sized impact.
For me, the best measure of stress has always been the EURCHF. That pair is sending off alarms. We are just a tad above the all time low of 1.2770. I see no reason why a new low should not be set by the NY open.
The strong Swissie, weak Euro story has been with us for quite a while now. This graph shows how far we have travelled on this cross.
It is easy to blame all of the weakness in the EURCHF on the ongoing circus in Disney Euro Land. But I think there is more to the story. The recent meltdown in the cross started on 11/3/2010, the day that QE-2 became a reality (surprised?). I never have believed in coincidences, this time is no exception.
As of the end of the third quarter the Swiss National Bank reported reserves in Euros totaling 90.9b. If the year-end rate is the same as today it translates into a three-month loss of CHF 5.5b (USD 5.6b). On a population-adjusted basis this would be the equivalent of a $214b loss in the US. On a GDP comparison this is equal to $160b. Can you imagine if the Federal Reserve had a loss in three months of that magnitude? Ron Paul would shut them down. This is a big deal for little Switzerland.
The problem that the market faces is that the year is not over. Liquidity between now and year-end is going to get thinner and thinner. Big risk taking and big FX books are not in the cards this holiday. That being the case, some unanticipated things might occur.
Watch out for gaps in currency trading for a bit. If that starts to happen and volatility jumps up it will spread to other markets. I think markets have been "thin" across the board for some time. Equities are just robots moving paper for the most part. The big jump in global bond yields of late stinks a bit of liquidity issues. FX volume has been heavy, but are there folks who are willing to take on big new risk if money starts moving? I wouldn't think so. If money decides it does have to make a move over the next few weeks, then it's likely to have an out-sized impact.
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