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Swiss National Bank IntrigueMario Innecco Despite the SNB's campaigning against the Swiss Gold Initiative late in 2014 and its assertion that a YES vote would interfere with the bank's policy of capping the franc versus the euro the financial world was rocked by the equivalent of a major earthquake on the 15th of January, 2015 as the SNB decided to do a U-turn and abandon the cap on the franc versus the euro. We all know by now what happened to the Swiss franc on Thursday so I will focus on why I think the SNB shocked the financial world and in the process wiped out many highly leveraged foreign exchange traders and speculators. Why would the SNB change a policy that it had been adamantly protecting just recently? I personally think that the continued weakness of the euro versus the dollar has put a great deal of pressure on the SNB as it continued to keep the cap on the franc as the dollar kept rising versus the euro. Even though the Swiss Gold Initiative failed to pass last November there has been political pressure on the SNB to stop inflating its balance sheet. As a result it is my opinion that the SNB, not expecting the euro weakness of these last few months, decided to get out of a losing trade while it could. By lifting the the cap the SNB is basically saying it does not want to buy any more euros but at the same time it has hundreds of billions of euro paper on its balance sheet. With the ECB expected to announce a new QE program on Thursday the 22nd of January, 2015 I expect the SNB to be a keen seller of its euro assets in the months to come. What better way to sell its euro denominated government paper! My expectation is that just like FDR the SNB will use its proceeds from selling its euro assets to buy gold. Back in the early 1930s the dollar was the Swiss franc of its day as European capital fled a failing financial system to the relative safety of the then gold backed dollar. This exodus from European currencies to the dollar exacerbated the deflationary economic environment in the U.S. FDR called a bank holiday in 1933 as a result and subsequently devalued the dollar by 75% by raising the official gold price from $20.67 to $35 in January of 1934. By buying gold the SNB will alleviate the deflationary pressure that a strong currency brings. What better way to unload its mountain of euro assets and at the same time assuage its political foes at home. ### Mario Innecco Mario Innecco: Sales and Marketing Executive in U.K. financial services industry with extensive experience in Fixed Income Exchange Traded Derivatives market. Consistently developed significant and sustainable new business in several major financial institutions. Worked effectively with teams in growing existing business and marketing to prospective institutional clients worldwide. Major clients were Asset Managers, banks and corporate treasuries. 321gold Ltd |
