Swiss Move Crushes Currency Brokers Brokers around the world are crumbling in the wake of the Swiss National Bank’s shock decision to remove the cap on its currency, with a major U.S. currency broker warning its equity was wiped out and others closing their doors.
On Friday, regulators in Japan, Hong Kong, Singapore and New Zealand sought information from brokers about what happened. In Japan, the Finance Ministry was checking on trading firms after industry sources said the country’s army of mom and pop foreign-exchange traders suffered big losses.
The losses were caused when big wholesale banks stopped quoting franc rates, liquidity dried up and volatility spiked in the foreign-exchange market Thursday, making it impossible for brokers to execute trades as losses spiraled. Many of these brokers offer 100 to 1 leverage, allowing clients to stake large sums with relatively little cash, meaning a 1% loss can wipe out a client. (…)
To prevent losses from spiraling out of control, investors and trading firms often put automatic sell orders in place when currencies move a lot. But the very large jump in the Swiss franc happened so fast that everyone tried to close out their trades at the same time. Liquidity disappeared, making it impossible to execute the trades and allowing losses to spiral upward. (…)
Many people used the normally stable Swiss franc for carry trades, where investors borrow in a currency from a country with low interest rates and then exchange it for a currency in a country where rates are higher and collect the difference. In this type of trade, which is usually highly leveraged, investors would have effectively been betting against the Swiss franc. (…)
- Swiss central bank chief Thomas Jordan may not have warned European Central Bank chief Mario Draghi and others about the move, either: “I would hope that it was communicated with other colleagues from central banks. I’m not sure it was.” (IMF Christine Lagarde)
Mohamed El-Erian
SNB decision will ripple far beyond Switzerland
(…) They risk destabilising some other countries and decision-making in the neighbouring eurozone will become even more complicated and contentious.
Confirming the historical lesson that large currency moves tend to break things, they also highlight the extent to which central banks, operating in a world of growing economic and policy divergence, are struggling to maintain the paradigm of low market volatility that is central to their efforts to generate higher economic growth. (…)
More importantly in terms of global systemic effects, politicians in the core economies within the eurozone — including Germany, Austria, Finland and the Netherlands — will see the SNB’s move as a reaffirmation of the dangers of substituting financial engineering for real economic reform. As such, they will be less willing to accommodate the hyperactivism of the ECB. And while this is unlikely to stop the ECB from doing more, it may increase the legal, reputational and unity risks it takes in doing so.
Then there are the consequences for a global economy which, in the absence of a comprehensive policy response in the advanced world, has ended up overly reliant on central bank interventions. Given that their tools cannot reach directly and sufficiently at what holds back growth and jobs, these central banks have been forced to use the partial channel of financial asset prices to influence real economic outcomes.
To this end, central banks have sought to repress market volatility as a means of encouraging risk taking that would then boost asset prices and thus encourage greater household consumption (via the wealth effect) and corporate investment (via animal spirits).
The SNB’s decision is further evidence that central banks are finding it harder to implement a policy of volatility repression that already was being challenged by the growing divergence in policy prospects between the eurozone and the US.
All of which leads to a simple but important conclusion that is relevant both to Switzerland and many other economies. The post-2008 period of excessive reliance on central bank policies needs to give way to a more comprehensive policy response that deals with the fundamental shortcomings in supply responsiveness, demand and debt overhangs. The longer that is postponed, the greater the risk of abrupt policy moves that accentuate the related probabilities of policy mistakes and market accidents.
EU Consumer Prices Fall for First Time Europe edged closer to deflation in December, as consumer prices across the European Union’s 28 members fell for the first time since records began in 1997.
The bloc’s statistics agency on Friday confirmed that consumer prices in the 18 countries that then shared the euro were 0.2% lower than in the same month of 2013. But new figures showed that prices also fell in the EU as a whole, by 0.1%.
Sixteen EU members experienced an annual decline in consumer prices during December, up from just four in November. And with oil prices tumbling, inflation rates around the continent appear likely to decline further in coming months.
The truth is that energy prices collapsed 6.3% YoY in December. Ex-energy, annual inflation was steady at +0.6% Y/Y, +0.3% MoM. Month-to-month inflation ex-energy was essentially flat between March and November.
Drilling a bit further, core inflation (ex-food, energy and tobacco) rose 0.35% MoM in December after being essentially unchanged between March and November. Core prices rose 0.6% in Germany in December, 0.5% in France, 0.3% in Italy.
European Car Registrations Rise New car registrations in Europe rose for the first time in 2014 after six straight years of declines, but remained below pre-crisis levels, as the auto industry made a fragile recovery amid slowdown worries in some regions.
New car registrations, a proxy for sales, rose to 12.6 million vehicles last year in the 28-nation bloc, up 5.7% from a year earlier, according to data published Friday by the European Automobile Manufacturers’ Association.
In December, new car registrations rose 4.7% to 951,329 vehicles, driven by strong demand in Western European countries, excluding France.
Registrations in Spain rose 21% in December, mainly because of government subsidies and a rebound in private consumption, while the U.K. shot 8.7% higher. In Germany, Europe’s biggest car market, registrations jumped 6.7%.
Still, growth in December was capped by France, where registrations fell 6.8% due to its floundering economy. For the year, the French new car market stagnated at around the prior year’s level.
IEA Cuts Forecast for Non-OPEC Oil Supply Growth The collapse in oil prices is expected to slash growth in non-OPEC oil production this year, bolstering demand for the producer group’s own output, the International Energy Agency said.
(…) “A price recovery—barring any major disruption—may not be imminent, but signs are mounting that the tide will turn,” the IEA said in its closely watched monthly oil market report, as it slashed its forecast for the increase in non-OPEC oil supply this year by 350,000 barrels a day. The knock-on effect of that is an expected increase of 300,000 barrels a day in demand for OPEC’s oil this year to 29.2 million barrels a day.
Still, oil production from the U.S. is expected to remain robust this year, with supply growth slipping by just 80,000 barrels a day, according to the IEA. Oil output from Canada and Colombia is expected to weaken slightly more, adding to the easing in supply growth.
Meanwhile, OPEC’s oil output continues to exceed demand projections and the group’s own output ceiling of 30 million barrels a day. According to the IEA, OPEC production rose by 80,000 barrels a day in December to 30.48 million barrels a day, marking its eighth straight month above the group’s official output target.
Saudi Arabia set to cut state spending
In a note to clients, Citi, the US bank, predicted real expenditure in Saudi Arabia would drop to $241bn this year, down 17.8 per cent on the figure for 2014. As a result, Saudi Arabia’s non-oil economy would contract 5 per cent this year, Citi said. (…)
With oil accounting for up to 90 per cent of the kingdom’s revenues, the Saudi stock market, which is expected to open to foreign institutions this year, has fallen by a quarter over the past three months.
While Riyadh has indicated that it is unconcerned by the sliding oil prices, which has more than halved since the summer, some leading figures, including Prince Alwaleed bin Talal, the billionaire investor, have warned against the government’s reluctance to act to reverse the fall. (…)
Target Bails Out of Canada
Target spent the equivalent of more than $4 billion setting up its Canadian operations, which now encompass 133 stores and 17,600 employees, and endured $2.5 billion in losses there over the past two years. But the effort was undermined by a series of errors—from poor store locations to bad pricing decisions—and Target recently determined that the red ink couldn’t be stopped for another six years.