Notes for currency wars
With news dominated by the Greek elections, the imploding Spanish economy and more, people tend to forget about other issues. One of those being the currency wars going on. Some thoughts on the subject, via Voxeu.
In the mid-1990s, many of the large developed countries ended their activist approach to foreign-exchange-market intervention. Yet while these operations faded, they never disappeared. The Great Recession recently piqued interest in them, as exchange-rate volatility increased and threats of currency wars were heard (see Neely 2011). Still, then, the key question remains: Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies? Japan, Switzerland, and China provide some lessons on that score. In recent research (Bordo et al. 2012a), we demonstrate that despite differences across these three countries in their degree of exchange-rate flexibility and their extent of sterilisation the fundamental trilemma holds.
The fundamental trilemma of international finance maintains that a country cannot simultaneously peg an exchange rate, maintain an independent monetary policy, and permit free cross-border financial flows (Feenstra and Taylor 2008). At best, only two of the three are feasible.
UBS and the Big Trade?
In order to “loose” 2 bln USD, you need to take quite big positions. While UBS is not saying anything, the “bet” must be in a fairly liquid product, and if not “hidden” below the desk, it is almost impossible to loose it on Equities Trading.
Maybe the trade was an extremely big Vega position on the CHF/EUR. A long Vega position seemed like a rather intelligent trade only some days ago, before the SNB announced to “peg” the CHF.
By doing that, volatility on CHF collapsed to virtually zero. Suddenly a winning smart trade, turned out to a nightmare, when CHF all of a sudden became “pegged”. There are very few, if any, Risk Matrixes capturing this kind of scenario, because it does not happen. This is an event outside any Risk Managers stress test. This is a Black Swan event for the holder of Volatility, and the biggest ironi, such a trade would have been perfectly positioned for the turmoil in the Financial Markets. A Black Swan is not always a Black Swan.
Below 30 day chart of the CHF/EUR. Note the totally vanished vol in the pair. If this was the trade or not is to be seen, but this is a possible senario, given the liquidity in the currency market.
The Alleged Rogue Trader’s Facebook Update on the 6th of Sep;
Mr Adoboli’s last update to his Facebook page, dated September 6, simply reads “Need a miracle”.
….it just might be the above trade that caused the loss, as SNB “pegged” the CHF on the 6th of Sep…
News That Matters
Ft.com
The Swiss National Bank’s decision to set a SFr1.20 floor versus the euro has sparked a flurry of strategic adjustments by investors and added to the volatility that has been roiling markets of late,http://ftalphaville.ft.com/thecut/2011/09/06/670711/snb-move-on-franc-sparks-more-volatility/
Banks, exchanges and trade repositories should be forced to disclose more timely and comprehensive data because increased transparency would help investors to price risk and discourage contagion panic,http://ftalphaville.ft.com/thecut/2011/09/07/671016/fpc-member-calls-for-more-disclosure/
Google’s offices in Seoul have been raided by South Korean regulators, the FT reports, citing two people familiar with the situation. Google itself refused to confirm the Korea Fair Trade Commission had visited its offices. http://ftalphaville.ft.com/thecut/2011/09/07/670956/regulators-raid-google%e2%80%99s-seoul-offices/
The Manhattan district attorney’s office has issued subpoenas in recent weeks into the way Goldman Sachs marketed some CDOs before the financial crisis, the WSJ says, citing people familiar with the matter. http://ftalphaville.ft.com/thecut/2011/09/07/670926/subpoenas-issued-on-goldman-cdo-sales/
The Institute of International Finance, which represents the biggest financial groups, claims in a study that higher bank capital rules will drive up the cost of credit, hampering global growth and wiping out 7.5m jobs. The FT reports the IIF, http://ftalphaville.ft.com/thecut/2011/09/07/670896/banks-say-capital-rules-will-cost-7-5m-jobs/
Twenty high-profile economists have written to the FT arguing that George Osborne should drop the 50p top rate of income tax “at the earliest opportunity” to boost growth. The economists say the move is essential to create an internationally competitive tax regime that will allow Britain to enjoy long-term sustainable economic growth. http://ftalphaville.ft.com/thecut/2011/09/07/670886/economists-argue-50p-rate-should-be-dropped/
Daily Gold
By Gold Core;
Gold is trading at USD 1,899.50, EUR 1,339.10, GBP 1,177.30, CHF 1,611.10 (up from CHF 1,486.50 yesterday) and JPY 146,350 per ounce. Gold is down 0.18% in dollar terms and strong physical demand continues at these levels.
Just prior to the announcement, spot gold for immediate delivery had risen to a new record nominal high of $1,921.15/oz in early morning trading in Europe.
Then just before 0900 hours GMT came the news that the Swiss National Bank has decided to fix the country’s exchange rate at 1.20 Swiss francs per euro. The SNB indicated it would buy an unlimited amount of euros regardless of the risk to maintain that value.
In a matter of minutes, gold fell 3% from the high of $1,921.15 to an inter day low of $1,862.72. It then recovered as quickly and surged back to over $1,912/oz.
Gold’s London AM fix this morning was USD 1,891.00, EUR 1,330.75, GBP 1,172.86 per ounce. Gold fixed lower in all currencies (USD 1,896.50, EUR 1,341.13, GBP 1,174.67 per ounce).
The SNB announced the currency fix because of what it called “the current massive overvaluation of the Swiss franc.”
It said it will “no longer tolerate” an exchange rate below the minimum rate of 1.20 francs, which it said is still high.
Gold in Swiss francs – 1 Day (Tick)
The euro, which had been trading at close to 1.10 Swiss francs before the announcement, surged 9% to 1.2024 in the minutes afterwards.
Latest comments