EURCHF and Dollar Index to soar as we head to global QE Extreme

The chart below shows why the new SNB EURCHF floor could be of extreme importance. I am just back from yet another trip to Zürich and I found people extremely bullish on CHF – with talk of corporates wanting to sell, sell, sell etc. But franc bulls need to pause a moment to consider the following few points:

• The SNB has an ‘unlimited ability to print money’
• The SNB is worried about deflation – hence the need to monetize
• The bias is far too complacent on the direction for the CHF, with more than 95% on the bullish side

• The SNB is clearly committed and feels there is no alternative and perhaps even more importantly, they have full political backing from the government.

Source: Bloomberg LLP and Strategy and Research

 

I have two strong view for the next 12 months:

1.       A much stronger US Dollar - DXY to 100 (now 75.00)

2.       A much higher EUR vs CHF - to 1.40/1.50

The scenario for much stronger US dollar:
The view on the greenback strengthening is based on a  too low consensus on US growth, better than ‘announced’ jobs and consumer spending data. Finally, the US will become competitive inside next two years on unit labor costs. Add to that the fat tail risk of HIA 2 being introduce- and the rest of the G-20 moving toward the same kind of QE measures we have seen from the US Fed – why should only the USD be punished for QE when “everyone is doing it?” (see more below)

 

The Scenario for a much higher EUR/CHF

The SNB has no alternative, Switzerland is headed full steam into “Japanisation” without extreme measures that include a major change in the “expectation curve” when we see 1.30 plus in EURCHF. Also, investors will have to cover massive losses from selling EUR calls. Finally, inside the next 12 months we will have some kind of a “resolution” on the EU debt crisis.

 

Macro themes
There are really only three ways to deal with the current situation:

1. Accept Crisis 2.0 – deleveraging and pain, but also better for longer term restructuring – unlikely accepted by policy makers but more likely from a market perspective.
2. Accept Japanisation – deflation, slow-growth and no structural changes.
3. Go to QE Extreme/Maximum Intervention – betting that the ‘weather’ will improve by spending ever more money and making very gradual structural changes. The Keynesian economists/advisers are again getting upper hand as they now can claim (wrongly!) that the reason we did not get back on track is because we did too little, too late – similar to Japan. This is the route the G-20 will move to for now. I see all major nations in QE Extreme/Maximum Intervention mode by the halfway point of 2012.

 

By the way, more specifically on the current EuroZone crisis: Greece going bankrupt is not a fat fat-tail event (Black Swan), it’s the most expected outcome ever!

 

If Greece leaves the EU,  it will lead to a major “risk on” scenario as Europe will have regained the initiative, so if the Euro-zone’s next development is a break-up from the weak (Greece) then it’s good for risk – if it’s a break-out from the strong (Finland or Germany) it’s Crisis 2.0 extreme. Chances? 50/50

 

That’s it for now – I’m off to Spain and the Vuelta and some fact-finding,

 

Have a nice week-end

 

Steen