Swiss National Bank’s Decision and Global Currencies: A real stunner By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Mr. Thomas Jorden, the Swiss Federal Reserve Chief, yesterday (15.01.15) delivered a speech on their monetary and exchange rate policy which hit the global currency market like a nuclear bomb. Basically, what he said was that he would be getting rid of the three year old cap of 1.20 per Euro on the Swiss Franc. An analyst of the Swiss bank said and I quote “there was a big silence and someone said “boom” when he announced this. Immediately the value of Swiss Franc jumped tremendously against the Euro and the US dollar. A one day appreciation of 17 percent is never heard of in the financial market. As one summarized it said and I quote “the reaction, it was panic”. This is a conversation between a student and his finance professor.

 

Student:          Prof. It is mind boggling to hear that the Swiss Franc appreciated 17 percent in a single day against Euro. This must have been a nightmare for currency traders. How and why did this happen?

 

Prof:                I have always been repeatedly saying that the global financial system is already in a deep disarray. In today’s financial market impossible things happen in a jiffy. For example in one day, the Swiss Franc appreciated to touch 85.17 centimes against the current 19 member currency. This amounts to the Euro being devalued massively against the Swiss Franc. The chief of the Federal Reserve said that maintaining the current exchange rate (1 Euro = 1.20 Swiss Franc) was neither meaningful and nor sustainable.

 

Student:          Can this be repeated elsewhere? How will it affect all the other currencies?

 

Prof.:               There are bombshells about to happen. Here are my expectations.

 

1. The collapse of the oil price from around 120$ a barrel to 45 dollars is going to create major economic slowdown in the 21 oil exporting countries.
2. Gold is currently trading at around $1250 ounce. With the imminent increase in the US dollar, its value will likely to fall and this in turn will bring down the value of other commodity prices.
3. Slowdown in oil consumption in the oil importing countries will have a contagion effect on the countries who are exporting to them.
4. In India, we may see several hundreds of thousands of workers who are toiling in the Middle Eastern oil fields may return to India, thus reducing the NRI inflow.
5. The QE to be discussed and adopted in the euro zone will have the value of euro moving much lower. Basically this will amount to devaluation.
6. Japan with all its abenomics will allow its currency to move lower to stay competitive with the euro zone.

You see, things in the global financial markets are changing rapidly and it is hard to pinpoint and say how things will pan out in the future. But one thing is certain, the previous consumption driven economies are definitely going to slowdown. This will result in huge surpluses in supply of manufactured goods.

 

Student:          Thank you Sir. I know you are in a hurry to get to class.

 

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