Those who frequent these pages hear quite a bit of talk about black swans, tail events, and multi-sigma anomalies.
This despite my growing apprehension with regard to the writings of the black swan godfather Nassim Nicholas Taleb.
Well, those of us who were trading “all the way back” in 2015 remember vividly the FX black swan that landed with an impressive splash on January 15, when Switzerland finally gave up on the franc peg:
That 16-sigma whopper was a rather poignant reminder of how vulnerable we are to being blindsided thanks in no small part to the evolution of market structure.
Well as it turns out, we might see another sharp move higher for the franc sometime in the not-so-distant future thanks to none other than Donald Trump. Consider the following via Deutsche Bank:
The Trump administration has spoken out against alleged currency manipulation from China, Japan and Germany. Yet the country most at risk of meeting the Treasury’s official criteria of currency manipulation is probably Switzerland.The risk of coming into US focus, perhaps as early as 2018, could add to the rationale for the SNB to gradually discontinue market intervention. On Treasury rules, trading partners need to meet three criteria to be deemed currency manipulators. First, they need to intervene to the tune of at least 2% of GDP a year to cap their exchange rates. Besides Taiwan, Switzerland is the only country that ticks this box with a whopping 9%. Second, they need to run current account surpluses of at least 3% of GDP, well below Switzerland’s 10%. Third, they need to run at least a $20bn goods trade surplus against the US. Unlike most countries on the Treasury’s watch list, Switzerland is still below this threshold at $13bn, but the surplus has been growing at such a fast clip that it looks set to exceed the threshold in 2018, especially if USD/CHF strengthened further (chart 1).
Official ‘labeling’ by the Treasury has not been a necessary condition for President Trump to threaten supposed currency manipulators with retaliation. Yet it would likely be a sufficient condition. Although bilateral trade with Switzerland is small from the US perspective, it could come into the administration’s focus if the Treasury officially cried foul. And while the Treasury’s designated process from ‘labeling’ to actual retaliation is lengthy, President Trump could jump the gun and impose retaliatory measures by executive order as a symbolical precedent.
How drastic US retaliation would turn out be is far from clear. As an assumption, the administration could impose a 20% tariff on Swiss imports. This would be a severe blow to Switzerland, since trade with the US, whilst accounting for only one seventh of Swiss gross trade, generates almost half of its net surplus (chart 3).
Basically, Trump could pick on Switzerland if he wanted to in order to send a message to the bigger fish that he really wants to fry.
This would effectively force the SNB to choose between allowing the franc to hit parity with the euro (which is what would happen if they stopped intervening) or getting hit with punishing tariffs.
So buy your expensive Swiss timepieces now.
Oh, and if you have any open EURCHF positions, dedicate one of your monitors to Trump’s Twitter feed.
