Last night’s move by the Swiss National Bank (SNB) to abandon the EURCHF floor at 1.20 is the first sign that Gerard Minack is right and the air is starting to come out of the Central bank bubble.
Earlier this week Minack, former Morgan Stanley strategist and one of the world’s most followed economic and market strategists, told the AFR that Central bank Credibility was “biggest bubble out there.”
What he meant by that was that politicians and the markets belief that central bankers, monetary policy and quantitative easing could cure all the economic ills of the world and paper over the cracks in the global economy, particularly Europe, were misplaced.
Indeed he added: “If Draghi was a stock he’d be on a P/E of 200! Yellen’s on 100. When that bubble pops, all hell will break loose again, and there you really just want to be in cash.”
That’s not an endorsement.
But the action of the SNB, which is considered one of the world’s most important central banks, is telling because it has broken a promise to the market, to the Swiss people, and to Swiss businesses that it would not allow the woes of the European economy to cross the border into Switzerland.
What has traders up in arms and has so enraged noted investor and market watcher Anatole Kaletsky that he retweeted a note he wrote last year, “A central bankers licence to lie“, is that just last week the SNB President Thomas Jordan stood firmly behind the EURCHF floor.
You get also get a sense of the market’s anger in this quote from the NAB’s London based Senior Currency Strategist Gavin Friend who wrote:
Today Jordan went back on his words of the last couple of years – words uttered only on Tuesday to a Swiss broadcaster that he and his central bank officials “were convinced that the cap on the franc must remain a pillar of our monetary policy,” by saying the policy was now deemed to “not make sense” and could only be carried out by “constantly intervening in the market.” Aside from the collapse in SNB credibility that must surely follow, these are strange remarks indeed.
Credibility is a fragile thing and the SNB has just made it harder for Mario Draghi to act without acting – as he has for the past two years. Already USDJPY, the Yen being the market turmoil safe haven, is heading below 1.16 and looks set for a big move. Gold has broken $30 higher and there is a sense that volatility is rising and will feed on itself.
The SNB might just have set the scene for the market dislocation everyone fears.