Dollar bears are getting their way in the currency markets right now. While most eyes are peeled on Sterling (up 3 big figures since Friday) and the Euro, all currencies are rising against the Dollar (including the Commodity Dollar Complex – Auusie, Kiwi, and Loonie). For me, the most interesting currency is the Swiss Franc because it is approaching parity with the U.S. Dollar (now down near 1.06 on the dollar) . The problem with Dollar/Swissy parity is Eastern Europe.
This brings us to EU East. And by that I mean members of the European Union nations east of the Eurozone, which stops at Germany, Austria and Italy (Slovakia is also a Eurozone member as of Jan. 1st). Countries in this region have seen fantastic growth rates over the past decade, but, also a huge increase in debt, asset prices, and current account deficits. All of this points to excess.
The problem, of course, is the Impossible Trinity. These countries want stable exchange rates, monetary policy control and free movement of capital. But, with the excesses already highlighted, the first to go in this trio was always going to be the exchange rate.
Now, EU East loaded up to the nines with debt in Swiss francs, Euros and U.S. Dollars. Companies, Individuals, even hospitals have huge foreign currency debt exposure (see my post “Reverse carry trade borrowing is deadly” from October).
The above is a quote from my post “The European Problem.” And this is one reason I wouldn’t be long the Euro – because European banks are a lot weaker than is presently being admitted. But, I am writing here about the Swiss Franc, not the Euro. As I see it, a strong Swiss Franc is not a good thing for anyone – Swiss bankers, debtors in Poland or the global economy. But this is what we are getting right now. Back in March I said this is exactly what Swiss central bankers are trying to avoid:
Apparently, the Swiss franc is too high — or so says the Swiss central bank. As a result, they are selling francs in the foreign exchange market to get the franc to come down. There has been a lot of speculation about the Swiss and their plans to devalue the Swiss franc, including on this site. It now seems clear that devaluation is where things are headed. Quantitative easing (QE) may be next.
Watch this trade because it is going to create problems in Euroland where Eastern European debtors, struggling with a depression and in the last economies likely to recover, are going to come under increasing stress. CEE stress means Swiss bank and Austrian bank stress and writedowns in particular – and this will have very serious consequences for Europe as a whole. Market rallies that move too far too fast often sow the seeds of a whiplash trade down the line.
