Quote from ralph00:
So that's great, the SNB is the buyer of last resort for falling-in-value euros which it then trades for euro-denominated paper yielding essentially nothing and that can only fall in value from this point. Outstanding.
How do you figure that? Given that the only thing that this paper has done is go absolutely offer-less up to now, what makes you think it can only fall in value from this point onwards? That's logic I don't really understand... Furthermore, German schatz trades at smth like -40bps in repo. It's pure gold dust, at the moment, regardless of what it yields (e.g. German bubills auctioned at negative yields recently).
And what happens to the SNB balance sheet/income statement if German 2-years go to 0% (yeah for the SNB) while the euro drops to $0.90 (boo)?
Well, whatever makes you think that with EURUSD at 0.9, schatz is going to trade at 0? Firstly, it can easily trade negative. In fact, there's a whole lot of people that have been buying schatz calls with strikes implying -1% etc yields on the bonds. Secondly, I know the SNB marks to market (sorta), but aren't we speculating about what happens to their reserves in case of the EMU dissolution? If the EMU actually sticks together and EURUSD is at 0.9, do you think that will be a massive problem for the Swiss economy?
Let's take it a step further. What if this Blocher fellow amasses more power in Switzerland, Jordan doesn't get appointed as SNB chair, and markets get a sniff the SNB may want to sell its euros (meaning it would have to unload its German paper)? Those German 2-years could plummet in value while the euro falls even more. Hello IMF.
Yeah, and if they decide to suddenly sell all their gold and the mkt finds out, they'll lose a lot of money as well. If the SNB, regardless of who's running the show, is stupid enough to do what you describe, I am 100% with you. Switzerland should go to the IMF. I hope the IMF has some sort of a "Stand-By Stupidity Arrangement".
I'm not saying this will happen or even that it's more than a remote possibility, but there are no free lunches even if you're a central banker with your finger on the printing press button.
Well, who said it's a free lunch. The Swiss economy is paying a high price for the exchange rate. In fact, I can even kinda quantify it for you (very very roughly). Let's say that the SMI (the Swiss equity index) is a rough measure of value-added in the Swiss economy. The SMI has rallied 20% from the pre-floor lows of the beginning of August (4792 to 5996 currently; the SPX is roughly unch in the same period). Current market cap of the index is Sfr730bn, so, using an extremely rough estimate, the "benefits" of the floor are "worth" arnd Sfr146bn. From what I can see, based on their data up to end of Nov-2011, in the same period the SNB has lost smth like Sfr19bn on their EUR-denominated FX reserves (and made arnd Sfr5bn on their gold holdings). Sure looks pretty cost-effective from where I am sitting.
Personally, as a trader, I wouldn't mind sitting on a portfolio like theirs: long gold, long German schatz, long Swiss economy, short CHF. It's quite long both tail risks with positive carry. What's not to like?
