There’s a massive market move setting up. It’s just a case of when it kicks off. And if you’re in it, you could make a small fortune. Let me explain.
I’m talking about the imminent fall of the Swiss franc (CHF). On 12 March, the Swiss National Bank (SNB) started buying US dollars (USD) and euros (EUR). By doing that, it was selling its own currency, with one goal – to drive its value down.
I won’t go into a lot of technical detail of why the Swiss authorities are advocating a weaker currency. Let’s just say that the environment in 2009 is very much one of ‘competitive devaluation’.
As the global recession grips the financial world, there isn’t any country right now that would complain if their respective currency was to weaken. Despite concerns regarding the risks of inflation re entering the system, the immediate danger is one of deflation. A little implied inflation by a weaker currency would be most welcome.
Historically, CHF has been seen as a safe haven currency. Over recent months, this has been especially prevalent. And actually, news of the swine-flu outbreak has only served to make this worse, although that’s only been a recent development.
Swiss bank must weaken its currency
The fact is that a strengthening of CHF has given the Swiss government a real headache. It is causing more deflation in the system than would otherwise be the case. It’s like Japan in the 90’s, when the rising Japanese yen (JPY) had the same effect. The Bank of Japan was forced to intervene aggressively in the currency markets to weaken the JPY, over a period of several years, buying nearly a trillion dollars in the process. The SNB has made it clear that it is prepared to spend whatever it takes to ensure that the CHF doesn’t strengthen any further. Of course, they can do this by effectively printing Swiss francs and then selling them in the market – i.e. buying other currencies.
There can be no doubting the resolve of the SNB to see this policy through as vice chairman Philipp Hildebrand is due to take over the chairmanship from Roth later this year. Hildebrand is even more outspoken than Roth in his determination to see the CHF weaken.
Clearly the SNB is patiently biding its time before intervening again. There are a number of reasons for this, not least a real desire to keep the market guessing on their next move. Be under no illusion, however, their next move will be to sell Swiss francs again. It’s a trend I want to get into and you can too .
Despite the fact that the Forex markets have been chattering about this for the past six weeks, all we’ve seen so far is a lot of volatility – the downwards trend in the ‘Swissie’ hasn’t kicked off yet. But I think it won’t be long.
Initially the market was caught off-guard when the SNB started selling its currency, despite warning over the previous weeks that it would be doing so. CHF weakened sharply versus USD and EUR, falling around 4% on 12 March. But the move proved short lived and CHF strengthened by as much as 7% from its low point against the dollar over the next few trading sessions.
The euro is the way to play this
But I’m actually more interested in the euro as a way to play the weakening of the Swiss franc. When the SNB started its intervention on 12 March, it was the euro that was bought more heavily than the dollar. It’s the currency pairing that affects Switzerland’s inflation the most, given that Europe is a more important trading partner.
I think EUR/CHF could rise to around the 1.60 level from the current 1.50. A 6% move in a currency is a big deal. Just consider that – in spread betting terms – it is a move of 1000 points. As with most things in life, timing is of the essence and so it is with the Swiss franc. Given the volatility we’ve seen in the market recently, it’s easy to get into a trade only to be kicked out by a sudden move.
That’s why for members of the Forex Trade Alert I’m currently looking for CHF to rise to the right level to sell it against the EUR. You’ve still got time to join us in this trade if you’d like to.
I’m expecting a move that could dwarf any stock market gains we’re likely to see in the coming months. The Swiss franc is heading lower.
Good investing,
Tom Tragett
For The Right Side Editor’s note: Tom Tragett is a 30-year veteran of the Forex markets. If you’ve ever wanted to make money from currency moves, but don’t know where to start, his Forex Trade Alert service could be perfect for you. Click here to learn more.
Spread betting carries a high level of risk to our capital. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit.
MARKET NOTES
Small caps are leading the market
BY SHIVVY ARORA
In bear markets, small-caps typically get hit harder than large-caps because of liquidity problems. As investors cling to safer assets and ditch riskier ones, smaller companies often plunge the furthest.
But small caps tend to outperform on the way up too, producing some spectacular returns for investors when a recovery sets in. That’s why risk-takers seeking high rewards love penny shares.
Below, we’ve charted the movements of the FTSE Small Cap Index (red line, ticker: FTSC) versus the FTSE100 (green line) over the past five years. You can see that during this period, small caps have continually outperformed Blue Chips as markets rallied.
Small caps could be working their way up this year
We can also observe how the gap between the two narrowed from the market peak in 2007. As stock markets began to plunge, small caps started falling quicker than the FTSE. By the middle of 2008, small companies were outperforming to the downside as investors “rushed for the exits”.
But take a look at the end of the last bear market in March 2003 (circled). It’s clear that smaller companies accelerated away from the broader index. By the end of that year, small caps had surged by 70% - twice the rise put in by the FTSE 100.
And we’re seeing a similar trend right now. Small caps have outperformed the Blue Chips in the first quarter of this year, as the arrow at the right hand side of the chart shows.
It’s too early to say whether we’re through the worst of this market now. But when we are, we expect to see good quality small caps continue to lead the broad market higher.
Editor’s note: In a recession, says small cap expert Tom Bulford, “cash is king”. Avoid companies saddled with debt. Tom has one simple rule to help you spot the companies that could be set to take off this year. To find out how the “Mattress Syndrome” could bank you 86% gains by April 2010, click here.
The Daily Reckoning – Over. Fini. Caput.
BY BILL BONNER
Paris, France
Tuesday, 28 April 2009
Pontiac is going out of business after 82 years. And General Motors is being taken over by the government.
Here at the Daily Reckoning’s office in Paris, we are delighted. It’s like being alive when extra-terrestrials finally come calling. Or when the Pope becomes a Mormon. We’re getting to see things we never thought we’d see... amazing things.
It must have been about 1960. Our father traded in the old Chevy for a Pontiac. It was an old one – maybe it was a ’54 or a ’56. But it was heavier, more solidly built, and quieter than the Chevrolet.
A few years later, boys from better families bought muscled-up Pontiac GTOs and Grand Prix. We remember, when we graduated from high school, a friend bought a GTO. What a thrill it was just to go for a ride... and turn up the radio!
And then, it must have been in the early ‘70s, our old friend Doug Casey drove up in a shiny Pontiac Firebird. We still remember the sound of it... deep, resonant... a baritone of an automobile; it probably sucked an entire oil well dry each time it drove up to the pump. Global warming on wheels.
But now... Adieu, Pontiac...
And we can probably say goodbye to GM too.
“US to take majority GM stake in revamp,” says the headline in today’s Financial Times.
How about that? America’s largest car company is going to be state-owned... nationalized... presided over by the federal bureaucrats.
It’s just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let’s give the feds a chance.
Even Henry Kaufman, writing in today’s Financial Times, says that the Fed’s “libertarian dogma” prevented it from controlling the banks properly.
But the Fed is hardly a libertarian organization. It’s a banking cartel. As a cartel, it looks out for its member banks – and doesn’t hesitate to use state power to do so. There is nothing libertarian about it... and no dogma associated with it – except as Greenspan’s eyewash – that is even vaguely libertarian.
The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow – who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector – notably, the big Wall Street investment banks – soared.
But bankers are vulnerable to too much of a good thing – just like everyone else. Soon, they made the classic Wall Street mistake – they came to believe their own hype. Not only did they gin up trillions of dollars’ worth of preposterous financial instruments... they actually bought these debt bombs from each other.
This posed a grave danger to the nation’s economy... and to the banking system. Henry Kaufman claims the regulators dropped the ball because they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as head of the Fed. He was probably still replying to messages at his old address when the crisis began. And the head of the New York Fed – now, US Treasury Secretary Tim Geithner – was elected to his post by the very institutions he was supposed to be overseeing.
Neither of them was about to stop the party; they and their friends were having too much fun.
And now, the feds are taking over control of America’s largest auto business...
Read on…
To read the Daily Reckoning in full, click here.
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