What 'Violet Thursday' Did For Swiss Francs, QE, And The Gold Price

January 21, 2015



First, let's call Thursday's SNB shock what it is. A 'reverse Soros'.

Back in 1992, the Hungarian speculator (and wannabee philosopher) George Soros bet £1 billion (some $1.5 billion) that the British pound could not stay inside the pre-euro system, then called the ERM (exchange rate mechanism).

Soros' huge bet famously "broke the Bank of England" ... forcing it to sell huge quantities of foreign currency to buy pounds in the open market ... and forcing the government to hike sterling interest rates from 10 percent to 12 percent and then 16 percent ... in the hope of driving its value higher and maintaining the peg against Britain's partner currencies in the European Union.

Alas, the pound was weak for good reasons, and the market won. On ‘Black Wednesday’ in September 1992, the UK abandoned its ERM peg ... and membership of the euro was written off for good.

The market won again this week, only in the other direction, on Violet Thursday.

But why now? Well, the European Central Bank meets this week. And after pussy-footing about since vowing to do ‘whatever it takes’ in October 2012 (when gold priced in euros again hit its record peak at €1380 per ounce), Mario Draghi and his team now find the data, electoral cycle and lawyers aligned.

Deflation is here, thanks to sinking oil prices. The Greek election, three days after this week's ECB decision, looks set to deliver the anti-austerity Syriza party to power. And there's nothing illegal about the ECB printing electronic cash to buy eurozone assets, said the European Constitutional Court of Justice's advocate-general Pedro Cruz Villalon on Wednesday.

The Swiss National Bank pulled its ceiling from the franc the very next day. Now or never on euro QE, in short.

One guess is that the SNB had in fact done the euro a favour back in 2011 when it started printing francs to sell for eurozone assets. Because the ECB wouldn't print euros to buy Portuguese, Italian, Greek or other weak debt. So the SNB moved to avert disaster for its biggest trading partner. Now the ECB is about to start printing at last. So the SNB can step down from the task.

This would stand up if eurozone assets had proved the biggest beneficiaries of Swiss QE cash. But no. Check the SNB's annual reports ... and compare them against its late-2014 breakdown of investment assets ... and you'll see that euro assets fell since 2010 from 55 percent of the total to just 45 percent ... thanks to the Swiss buying dollars, sterling and yen with their QE cash to depress the franc's value on the FX market.

A better guess is that, after three years of holding the franc down, the chaos that was certain to follow only grew worse with each day the peg remained in place. Better to get it over and done with than wait until after the ECB starts pushing the euro still lower from its decade lows, dragging the pegged franc with it and inviting yet more speculation that the peg would break in the end.

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